What Are ESG Factors?

Environmental, Social and Governance (ESG) factors, and the risks and opportunities that they present to companies and economies, can be financially material in all asset classes.

Material ESG factors should be considered in all investment decisions and risk management processes.

ESG issues cover a wide range of topics. There is no universal standard list of ESG issues, but many of the more common ones are illustrated in the list below.

This list is indicative and not exhaustive. Furthermore, although environmental, social and governance issues are often grouped under three separate headings, it should be recognised that they are closely connected and interdependent.

The types of ESG issues that are relevant to investors can vary widely across countries, industries, and companies.

Different investors may prioritise different issues in their RI policies and may use different criteria and methodologies for incorporating ESG factors into the investment process.

However, for the purpose of this tool, the key consideration is that ESG factors are financially material investment risks and opportunities that institutional investors can face over the short, medium and/or long-term.

This is in line with the interpretation of Regulation 28 and the FSCA Guidance Note.

How to identify, prioritise and act on material ESG factors:

To establish which ESG factors are most relevant to the pension fund, trustees should explore views on megatrends (at the macro / national level), including those of environmental and social nature that are influencing the future investment environment and real economy impacts (impacts at sector and business level), to determine how their institution can best generate returns.