ESG Rating Criteria: Environmental, Social, and Corporate Governance

ESG has become a hot topic in the global business and investment world, and it is also advocated by the Hong Kong government. Hong Kong companies may try to understand ESG standards, ESG rating agency criteria, and the available options for obtaining ESG certification.

ESG stands for Environmental, Social, and Governance, and it continues the spirit of Socially Responsible Investment (SRI) but focuses more specifically on these three areas. These standards cover all industries and almost all aspects of a company's operations, making ESG an important consideration in evaluating a company.

ESG Standard (1): Environmental

Governments and multinational corporations around the world recognize that the earth is a common destiny community, and thus, global environmental issues such as climate change and pollution must be addressed together. One of the main environmental goals of many countries is to achieve "Net Zero" carbon emissions. Investors also increasingly follow the policies of governments in various countries and value whether a company has environmental awareness and implements measures to protect the environment and ecological health in its operations.

ESG Standard (2): Social

Another important concept of ESG is social responsibility, which mainly focuses on "people," such as whether a company's employees are treated fairly and whether the work environment is safe. The concept of social responsibility also extends to whether a company allocates resources to help vulnerable communities in society and whether it has a tolerant attitude towards the LGBT community. Today, investors even require suppliers who cooperate with companies to share the same values, and not just focus on their own interests.

ESG Standard (3): Corporate Governance

The "Corporate Governance" aspect of ESG focuses on a company's internal governance and decision-making, such as the transparency of the company's accounting and financial statements, the composition mechanism of the board of directors, whether the company has passed a fair audit, whether shareholders have voting rights on company decisions, and whether the company complies with business ethics and morals. For example, if a company's CEO or senior executives receive millions of dollars in compensation and bonuses that are not in reasonable proportion to the treatment of middle and lower-level employees, it is likely to cause public criticism and make ESG investors unhappy.

The Rise of ESG Investment Strategies

In recent years, investment banks and institutional investors have increasingly paid more attention to ESG values as a series of comprehensive factors for assessing the risks that a company will face. Investors will analyze a company's past and current status to predict the chances of unexpected ESG-related events that could affect the company's stock price performance. In contrast to the past SRI concept, ESG is now seen as a factor that adds value to a company, and the term "virtue premium" has emerged.

ESG-Friendly Solutions to Help Companies Obtain ESG Certification from Rating Agencies

ISL is also concerned about the ESG trend and actively develops Software-as-a-Service (SaaS) solutions tailored to the needs of various industries to help companies meet ESG rating criteria. Our software tracks and records indicators such as carbon emissions, recycling rates, and air quality, and our system solutions help companies meet ESG rating agency certification criteria, contribute to the future of society, and increase the value of their company and brand. Please contact the ISL team for further information on ESG-related details.

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