Lesson 6 of 7 · 14 min
ESG factors: environmental, social and governance
ESG factors have moved from ignored externalities to quantifiable, material drivers of risk and value: environmental (climate, pollution, resources), social (people and communities) and governance (how the firm is run).
In short
- Investors increasingly take a stakeholder view and weigh ESG factors; issuers build them into strategy, operations, investment and financing.
- Why ESG matters more now: bigger material financial impact, investor demand (especially younger investors) and stricter regulation.
- Environmental and social costs used to be negative externalities; they are increasingly internalised and quantifiable.
- Governance is the easiest to measure and longest understood; E and S are harder to link to performance.
- A factor is material if it significantly affects results or the business model; materiality varies by industry.
- Climate risk = physical risk (weather damage, often insurable) + transition risk (regulation, demand shifts, stranded assets).
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