Sustainable investing emerged on the scene in the 1970s, and with new approaches came a flurry of new, sometimes conflicting, terminology. Sustainable investing covers a spectrum of approaches, from avoiding poor financial or non-financial options to pursuing positive returns and sustainable outcomes.
ESG investing, a subset of the broader term, is one approach that considers environmental, social, and corporate governance factors in addition to other financial criteria. ESG risks can materially affect a company’s performance.
Because the field is so nascent, the metrics used to measure ESG factors are still in development. Debate remains over the relevancy of down-funnel data points, like indirect carbon emissions from a company’s products.
Today, companies and investing firms also face a host of stakeholders with varying degrees of influence on ESG reporting.
Reporting standards and frameworks lay out, with a spectrum of specificity, what information should go in sustainability reports. Regulations vary dramatically by region. While the European Union has written sustainable-investing guidelines with the EU Taxonomy and Sustainable Finance Disclosure Regulations, legal restrictions have lagged in the United States.
Nongovernmental organizations, nonprofits, and sustainability coalitions have created their own guidelines to fill the vacuum on what data companies should disclose. This means that disclosures can change between industries, depending on what framework or standard you elect to follow.
Some focus exclusively on climate information, while others cover environmental, social, operational governance, and economic data. Some organizations offer de facto standards, while others offer more high-level guidance.
ESG ratings agencies might be one of the most visible stakeholders in the investing field because of the services they provide. Using public data but their own methodologies, ESG rating firms score or rank companies. If a company joins a sustainability agreement, sustainability partnerships and initiatives can also shape its approach to reporting.