Environmental factors assess a company’s impact on the natural world. This includes metrics related to carbon emissions, resource usage, waste management, and sustainability practices. Investors are particularly interested in how companies address climate change, as regulatory pressures and shifting consumer preferences make sustainability a critical element of business strategy.

Social factors evaluate a company’s relationships with its employees, customers, suppliers, and the communities in which it operates. Key considerations include labor practices, diversity and inclusion, employee satisfaction, and community engagement. Companies that prioritize social responsibility are often viewed more favorably by investors, as they tend to foster stronger brand loyalty and mitigate reputational risks.

Governance factors pertain to how a company is managed and governed. This includes board diversity, executive compensation, shareholder rights, and transparency in reporting. Strong governance practices are associated with better decision-making and risk management, making these factors crucial for investors assessing a company's long-term viability.

One of the primary reasons investors are incorporating ESG factors into their decision-making processes is risk mitigation. Companies that neglect ESG considerations may face regulatory fines, lawsuits, and reputational damage, all of which can adversely affect financial performance. By assessing ESG risks, investors can make more informed decisions and avoid potential pitfalls.

Research has shown that companies with strong ESG performance often outperform their peers in financial metrics. This is attributed to several factors, such as operational efficiencies, enhanced brand reputation, and improved employee engagement. Investors are increasingly viewing ESG as a driver of profitability, leading to a growing consensus that sustainability is not just a moral obligation but a financial imperative.

As awareness of ESG issues rises, investors are increasingly seeking to allocate their capital to companies that align with their values. Institutional investors, in particular, are beginning to demand ESG integration into investment strategies. This shift is leading companies to adopt more sustainable practices, as they recognize that attracting investment capital is closely tied to their ESG performance.