Global Finance · Chapter 19
ESG and Sustainable Investing
How environmental, social, and governance factors are reshaping investment decisions and corporate behavior worldwide.
What Is ESG?
ESG stands for Environmental, Social, and Governance — three factors used to evaluate a company's sustainability and ethical impact beyond financial performance.
| Pillar | What It Measures | Examples |
|---|
| Environmental (E) | Climate impact, resource use, pollution | Carbon emissions, renewable energy use, water usage |
| Social (S) | People and community impact | Labor practices, diversity, supply chain ethics |
| Governance (G) | Corporate leadership and transparency | Board diversity, executive pay, shareholder rights |
Why ESG Investing Has Grown
ESG assets surpassed $35 trillion globally by 2025. Key drivers:
- Millennial and Gen Z investors prioritize values-aligned investing
- Evidence that high-ESG companies face fewer scandals and legal risks
- Regulatory pressure in EU and US for ESG disclosure
- Climate risk is increasingly recognized as financial risk
Performance debate: Studies show ESG funds have generally performed on par with or better than traditional funds over the past decade, though results vary by fund and time period.
Types of Sustainable Investing
- Negative screening — excluding industries (tobacco, weapons, fossil fuels)
- Positive screening — selecting best-in-class ESG performers
- Impact investing — targeting investments with measurable social/environmental outcomes
- Shareholder activism — using ownership to push companies to improve ESG practices
Example: The $1 trillion Norwegian Government Pension Fund (world's largest sovereign wealth fund) excludes companies that violate ethical norms and engages with thousands of companies on ESG issues.
Greenwashing Risk
Greenwashing occurs when companies or funds exaggerate or misrepresent their ESG credentials. Regulators in the US (SEC) and EU are increasingly cracking down on misleading ESG claims.
Chapter 19 Summary
- ESG = Environmental, Social, and Governance criteria for evaluating companies
- Global ESG assets exceeded $35 trillion by 2025
- ESG investing strategies range from exclusion screening to impact investing
- High-ESG companies often face lower regulatory and reputational risk
- Greenwashing is a growing concern — verify ESG claims carefully