[MUSIC] Now that you have some background about ESG Investing, let's go a little deeper into the criteria that underlies the E, S, and G in ESG, as well as explore some relevant strategies for making investments in the green assets sphere. You can generally consider environmental social and governance issues as risks to a company's financial performance, and a further means of conducting due diligence when making investment decisions alongside other critical factors that may affect your returns such as revenues, cash flows, credit worthiness, and operational performance. As performing ESG analysis may be a daunting task, considering the multitude of known, unknown, and debatable variables that underpin environmental, social, and governance topics, there is a more discreet criteria that you, as an investor, may use to decide whether a particular company is either aligned with those values you deem important or whether it is effectively mitigating ESG-related risks to protect or bolster its bottom line and generate positive returns. Let's now take a look at some of the examples of this criteria for each of the components in ESG. Let's start with the E, the environment. If you're interested in investing in a company that has been historically involved in practices that have adversely impacted nature in some way, whether the air, the land, water, or forests, and the wider habitat, you may consider whether these natural risks posed by that company will have an adverse effect on its financial performance. Certainly you may decide not to invest in the company, at all, purely on principle. But if you choose to investigate further, you may ask, for example, does the company produce toxins that are deemed by a regulator, say, the US Environmental Protection Agency, or EPA, to be harmful. For instance, is it involved in any way with PCBs, or asbestos, or lead-based paint? Is it responsible for creating pollutants such as greenhouse gasses? Is it a chemical manufacturer, for example, that uses CFCs, or an agricultural company that produces methane, or an energy company that produces carbon dioxide? Is it a food manufacturer, or a cosmetic, or a pharmaceutical company that experiments on or, otherwise, mistreats animals? Or maybe it's a company that cuts down trees to manufacture wood-based products or supply timber. If the answer to any of these examples is, yes, you may then want to see whether any of these risks could hamper that company's financial performance in the future. Could it face regulatory fines for not complying with federal or local laws? Could it face litigation, and could its practices damage its reputation, spurring distrust in management? When conducting your fundamental analysis, you may also want to consider different views concerning environmental issues such as scientific findings that drive those government and corporate policies that are aligned with, say, climate change or forest management. For example, while many federal agencies and scientists may agree on the causes of global warming, others may argue about the lack of a single model that reveals repeatable and reliable evidence for their claims. Also, while initiatives to protect the world's force seem to be on the rise, recently, some contend that products manufactured from wood, such as building materials are not only significant carbon stores, but can also substitute other non renewable materials such as concrete or steel, whose production contributes large amount of carbon emissions into the atmosphere. As an investor, conducting due diligence can only help better inform your investment decisions. And factoring in as many variables as you can into your analysis, can help you draw more objective picture of the risk landscape. If, for instance, one argument seems more plausible to you than another, you may decide whether certain companies are deploying their capital to strategies that will benefit them financially. Now that we've covered the E in ESG, let's turn to the social component. When analyzing a company for social risks or risks related to its business relationships, you may want to ask how it treats its internal and external customers. Are its employees, for example, subject to hazardous working conditions? Does it abide by the rules of the occupational safety and Health administration's policies? Does it promote workforce diversity while maintaining a meritocracy? Has it engaged in any human rights violations? Do its suppliers mirror the company's values? Does it engage in profit sharing with local communities or inspire volunteers to work at, say, food drives? A government agency or corporation may have social projects as part of its ESG strategy. And these may include providing or promoting affordable basic infrastructures such as clean drinking water, or sanitation systems, or access to healthcare, education, and financial services, jobs, food security or socioeconomic advancement, including reducing income inequality. Again, since governments, agencies, or corporations may devote capital to social projects, as an investor, you would want to decide whether these projects will help protect or improve their financial performance. Now, the G in ESG centers on governance issues. For a corporation, these may include whether there is any corruption conducted by their management or employees. Do they have adequate policies addressing money laundering, for example, or are they breaching federal or local laws in other ways such as bribery or monopolistic behavior? Are their shareholders voting on all material decisions? Do any of its board members have conflicts of interest? Is compensation too far skewed towards top management. Does it use political donations in exchange for political favors? Is it transparent about its tax and accounting practices? Does it change its external auditor too frequently? Is that auditor credible and well established? Is the company involved in a pyramid or Ponzi scheme? In effect, when performing your analysis, you would want to determine whether any of the company's policies or actions taken by its management, employees, vendors, or others in its ecosystem, pose any risk of fines, litigation, or reputational harm that could adversely impact its financial future with an eye on whether this could lead to its bankruptcy or default. Moreover, although you may review companies' ESG disclosures, you may find that many of the variables that may be instrumental to your fundamental analysis are inaccessible through available reports. Information, for example, could include rumors, whether founded or unfounded, which may be stirring controversy and causing a company reputational harm. In general, ESG-related data analysis is a daunting task. And many companies and organizations have been working to address these issues, including more advanced technological tools and scoring systems to aid in the effort. Well, we'll address ESG scoring more in depth in a later lesson. We'll, next, turn our attention to how ESG has impacted the markets and disrupted various business sectors. We look forward to seeing you then. [MUSIC]
