Combining values with business
Green Screening think of the catchphrase ‘Think globally, act locally’ encourages us to be aware of the many factors influencing the health of the planet and to do small things on our own to address or minimize negative impacts. The idea is that if each of us do the small things, the combined efforts will make a difference on a global scale.
‘Green screening’ is the process where companies are examined by outside entities to determine their performance in environmental concerns. ‘Green’ can describe the company’s products or their processes and environmental impacts as they make other types of products.
In the investment world, green companies are part of a larger model called ‘ethical’ green screening investment choices. In this arena, the investor’s ethical values are the primary objective, along with good returns. The choice of investments can be based on moral, religious, and/or social concerns. Ethical investing is unique to each individual, and will reflect what that person supports or feels passionate about.
What does ethical investing mean in practice?
Investing ethically involves two sides of the same coin: First, choosing to avoid companies or entire industries dealing in gambling, weapons production, human rights and labor violations, environmental damage, tobacco, alcohol, and oil, among other things. This approach is called Socially Responsible Investment (SRI).
Second, investing in companies whose goals and practices are to positively affect society, the environment, or a moral issue such as labor practices. Environmental, Social, and Governance (EFT) funds represent these goals.
The practice of ethical investing is quickly becoming mainstream, especially among younger groups: 49% of millennial millionaires make their investments based on social factors.
How do I know which companies meet my ideals?
There are several categories of funds. Each of them focuses on different ethical concerns.
Environmental, Social, and Governance (ESG) funds examine exactly how a company’s products and services can effectively contribute to sustainable development in their direct operations, as well as across the supply chain.
The Environmental review can look at a number of components including carbon emissions, air and water pollution, deforestation, green energy initiatives, waste management, and water usage.
Social considerations include how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Working conditions, operations in conflict regions, health and safety, employee relations, and diversity are all considered.
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. It includes gender equality and board diversity, as well as ensuring the business is free from legal issues like bribery and corruption.
How companies are rated
Independent organizations give companies an ESG score based on how they operate in all these categories. The ratings allow investors to see which pre-screened funds rate high in ESG, while maintaining the same level of returns as they would with a standard approach.
The score also takes risk into account. How does the company manage their exposure to risk? This requires looking at a company’s exposure to industry-specific risks based on its business activities, size of operations, and where it operates. For example, sustainable forestry practices are more important in the paper industry than in the personal finance industry.
It’s important to know that the ESG score is a reflection of how a particular company stacks up compared to its industry peers and not how it rates compared to an ideal or to ‘perfection’.
What’s the benefit for companies?
According to a 2020 survey by the US Forum for Sustainable and Responsible Investment, SRI and its subsets account for more than a third of all professionally managed assets, equaling $17 trillion. The total is an increase of 42% in just two years, from 2018.
Companies pursue good ESG ratings for dual purposes: 1) it helps to attract investors to raise capital, to grow, and to fund their Corporate Social Responsibility (CSR) programs. 2) they must maintain or enhance their ESG ratings to remain attractive to investors.
ESG is good business
Studies show that businesses who prioritize ESG ultimately show higher financial growth, lower volatility, higher employee productivity, reduced regulatory and legal fines and sanctions, growth, and cost reductions. That is green screening in practice.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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