ESG Basics

Responsible Investing made easy

180bn USD

per year needs to be invested by 2030 to achieve the Paris Agreement goals [1]

Considering

ESG[2]

does not cost performance; with successful active fund management there is a chance for better performance while volatility remains at the same or lower level.

In the

WEF’s most recent Global Risks Report,[3]

published in 2019, the majority of the five biggest risks are linked to environmental concerns

More than just three letters, ESG will change our world

How sustainably does a company or even a state operate? ESG criteria, which have become established as standard in the financial sector and the corporate world, help to answer this question. ESG is the abbreviation for “environmental, social and governance” – a term that encompasses environmental considerations, social affairs and corporate management.

E for Environmental

Environmental criteria measure how the actions of companies affect the environment. They measure whether companies comply with environmental guidelines, how efficiently they use energy and resources, the effects that the production of goods have on the environment and the companies commitment to reducing carbon emissions.
Concrete questions are: Where is production taking place? Where do the raw materials that are needed to produce goods come from and how are they produced? What safety precautions are being taken in the extraction or production of goods? What impact do the goods have on the environment, how sustainable are they packaged? Or also: is renewable energy used for the operation of production facilities or office buildings?

Companies that fail to take action to reduce CO₂ emissions or protect against environmental incidents such as air, water and oil pollution or mining explosions could face government or regulatory sanctions, criminal prosecution and damage to their reputation. These are all issues that pose specific risks to companys, their stakeholders and shareholders.

S for Social

The "S" takes social criteria into account in company valuation. These include, for example, good working conditions and fair pay, compliance with labour rights and anti-discrimination guidelines, opportunities for training and further education, freedom of association, the composition and fluctuation rate of the workforce. Supply chains, consumer protection and product liability are also examined under this heading.

Companies with social and fair orientation are usually more successful in building long-term trust and loyalty. This in turn contributes to a resilient and sustainable business model. Popular employers are therefore usually also successful on the capital market. The social component of "ESG" is regarded as the most relevant when it comes to minimising company risks.

G for Governance

The "G" in ESG stands for governance and is aimed at corporate management factors, including long-term and sustainable corporate development. It examines how rights and responsibilities are distributed among the various stakeholders in companies - including the board, managers, shareholders and other stakeholders.
It addresses issues such as: How diverse is the Supervisory Board and how independent and qualified is its composition? Is the remuneration of the Supervisory Board appropriate and is it presented transparently? What rights do shareholders have? What guidelines exist for combating bribery, corruption and fraud and how are they implemented? How transparently is the past fiscal year presented in the annual report and also in the sustainability report?

The "G" is of central importance in order to judge opportunities and risks. Companies that are far below average in terms of good corporate governance may be more susceptible to mismanagement or scandals and risk their ability to exploit business opportunities over time. In addition, poor corporate governance practices can also affect the 'E' and 'S' factors of a company. If the management is corrupt, there may also be a lack of a sustainable business orientation or good working conditions.

Mr. Braun explains Green

Scientists have been highlighting the dramatic changes in our environment for decades. Only now, when the effects can be seen and felt around the world, are we grasping the seriousness of the situation and realising that climate change is not just a matter of saving our environment: it is about all areas of society, and it also has significant financial and strategic implications for companies.

Growing regulatory pressure worldwide

Sustainability is not only increasingly important to our everyday lives. It is also rapidly rising up the policymaking agenda, informing fiscal decisions at national and international levels. The European Commission's Sustainable Finance Action Plan is a prime example of a growing determination to integrate ESG criteria into the financial system. In order for the European Union to become climate-neutral by 2050, billions will have to be invested. The EU Sustainable Finance Action Plan supports the European Union's efforts to meet the ambitious climate and energy commitments adopted in Paris. These include reducing greenhouse gas emissions and doubling the share of renewable energies in final energy consumption. In addition, the European Commission also seeks to channel capital flows into areas that promote the United Nations' Sustainable Development Goals (SDGs). Asset managers such as DWS are crucial in shaping capital flows towards sustainable investments

ESG Handbook

As regulations drive ESG and corporations will have to implement sustainability across the entire value chain, DWS has developed a compendium that is intended to provide knowledge on the entire range of topics: ESG - The Handbook. It examines regulatory intentions, social developments and explains topics such as the relevance of data and what ESG integration actually is. The topics are underpinned at an appropriate point by insights into the DWS approach. It also offers our clients, from investment advisors and asset managers to institutional and private investors, advice and recommendations on how to prepare for sustainable investing.

Download PDF

Responsible Investing has a positive impact

A meta-study on ESG conducted by DWS and the University of Hamburg has become a cornerstone of the case for responsible investing. The authors of “ESG and Corporate Financial Performance: Mapping the Global Landscape“ examined more than 2,200 empirical studies written since the 1970s and concluded that there is “overwhelming evidence of the economic viability of ESG investments” and that considering ESG criteria need not impact on performance.
The positive relationship between ESG and performance was found to be especially strong for equities, fixed-income
securities and real estate. From a regional perspective, the studies also showed that ESG effects were particularly
relevant for performance in North America and also in emerging markets.

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Research and more

Apr 06, 2020 ESG

How Covid-19 could shape the ESG landscape for years to come

From more rigorous integration of social issues into the investment process to the strategic case for sustainable investments.

Mar 13, 2020 ESG

ESG investing - getting under the hood

Environmental, Social, and Governance (ESG) investing has gathered significant momentum over recent years. This momentum has occurred as investors aim to include material extra-financial information into their investment process with the aim of improving the return characteristics of a portfolio.

Feb 06, 2020 ESG

How European insurance regulators are responding to climate risk

Efforts to measure, stress test and manage climate risks among insurers are accelerating

1. Source: United Nations Organisation, January 2019.

2. Source: Metastudy on ESG Performance by Friede, Busch and Bassen, University of Hamburg, December 2015.

3. Source: WEF Global Risks Report 2019; Figure IV: The Evolving Risks Landscape, 2009 – 2019

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