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Interview: What is ESG? Investing With Environmental, Social and Governance in Mind

Andy Puzder was interviewed for this article which originally appeared on on Sept. 27, 2022.

Environmental social and corporate governance — commonly referred to as ESG — are non-financial standards used by asset managers and investors in financial decision-making.

ESG investing is sometimes referred to as sustainable investing or impact investing, and investors can use ESG standards and criteria to screen potential investments and monitor non-financial risks.

Environmental factors analyze how a corporation interacts with the environment. Criteria may include climate change, greenhouse gas emission, pollution or deforestation. Environmental factors may also analyze what risks the company faces from the environment, such as hurricanes or global warming.

Social criteria analyze a company’s relationship with its stakeholders and community. Criteria may include how the company contributes to nonprofit organizations or whether it encourages employees to spend time volunteering. Social factors also take into account how the company interacts with employees and whether it treats its workers and customers ethically.

AEI Senior Fellow Paul Kupiec said one drawback of ESG is that it is "not very well defined."

"What is socially beneficial is really subject to your personal interpretation," he said, noting that the social part of ESG standards can change over time.

The subjective element of ESG makes it difficult to give out ratings, Kupiec added. "That’s not a good thing, because people are going to be making investment choices based off these ESG ratings, which are all over the place," he said. "There’s no rhyme or reason to some of these ratings, yet the firms that invest based on them are picking and choosing investments based on this criterion that is not well defined or well measured."

There were more than 600 ESG raters and raging systems globally as of 2018, according to The Sustainability Institute from ERM.

"The most important thing for people to understand is that ESG is a form of investing where the focus is on implementing certain environmental, social and governance – social and political – goals, as opposed to enhancing returns for investors, which is a big change from the way investing has been done historically," Andy Puzder, a visiting fellow at the Heritage Foundation, told Fox News Digital.

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