Corporations try their best to manage the risks they know, so-to-speak. While there has been a shift away from the term “ESG” (Environmental, Social, and Governance), the underlying methodology continues to be a part of the risk and governance framework for companies and investors alike. We believe that companies that prioritize ESG practices can be better positioned to manage long-term risks.

ESG stands for Environmental, Social, and Governance.

We have noted before that ESG is really a risk management framework that may help companies identify and address potential risks and opportunities related to Environmental, Social, and Governance issues. And according to a 2024 report from Stanford Graduate School of Business, along with others, over 2/3rds of institutional investors who participated in the study (making up 47 institutions with trillions in assets throughout Europe and North America) believe that governance-related factors are important to their investment decisions[i]. Furthermore, over three-quarters of the respondents believe that investing with an ESG lens reduces risk.

[i] 2024 Institutional Investor Survey on Sustainability

The Future of ESG

While the term ESG has more recently received a negative connotation in the political sphere, its use by corporations and investors alike has remained steady. Even with potential policy rollbacks, market forces are driving the demand for the continued use of this risk framework. Furthermore, regulatory bodies both abroad and domestic are pursuing some form of disclosures surrounding ESG risks.

The Takeaway

ESG offers a framework that focuses on risk management related to issues involving things like climate change, biodiversity and corruption. Its usefulness can supplement traditional corporate and investment strategies and, accordingly, aid investors in making more informed decisions. Importantly, a diversification strategy that aligns with your financial plan and risk profile still remains key to mitigating your risks to meet your financial goals.