How to Tell If Your Investment Is Really Responsible

The boom in responsible investing worldwide throws up a key question for borrowers, fund managers and index compilers: How exactly do you evaluate and compare responsible investments? A whole industry has grown up to try to provide answers. It looks beyond financial performance to score companies and investments on criteria including their environmental friendliness, social impact and governance -- shorthanded as ESG. ESG ratings are increasingly taken into account in decisions on where to invest or allocate capital. But there’s debate over whether they can truly buffer against financial risk or even act as a guide to better-performing investments.

They help companies, investors and other finance professionals factor environmental, social and governance criteria into their decisions. They can help gauge whether a company is a global citizen, or how well it’s handling risks with potentially costly consequences. A rating can cover a long list of diverse factors including carbon emissions, water usage, gender equality, fair labor practices, human rights, crime-prevention controls, board composition and shareholder rights. There’s no single method for scoring or ranking companies. Some ratings companies rely on analysts, while others focus on quantitative information or company-provided data. They can analyze a company or fund for how transparently it reports such issues, or how well it stacks up against competitors or its own performance over time.