ESG Basics

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.

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.

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.