Financial Corner: What are ESG criteria?

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Question from someone in the UUCC congregation: I have heard that UUCC has an investment committee that collaborates with the bank to invest our funds in companies that meet ESG criteria.

What are ESG criteria? How do these criteria ensure that funds go to socially responsible companies that align with our mission and values at UUCC?

ESG criteria, which stand for Environmental, Social, and Governance, are a set of standards used to evaluate the sustainability and ethical impact of investments in companies. These criteria help investors identify companies that are not only financially sound but also socially responsible and environmentally conscious.

Environmental Criteria measures  a company’s impact on the environment. Key factors include:

  • Greenhouse gas emissions: Evaluating the company’s carbon footprint and efforts to reduce emissions.
  • Resource usage: Assessing how efficiently a company uses natural resources like water and energy.
  • Waste management: Examining how a company handles waste and its efforts in recycling and reducing waste.
  • Biodiversity and deforestation: Looking at the company’s impact on natural habitats and its efforts to protect biodiversity

Social Criteria evaluate how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Key factors include:

  • Labor practices: Ensuring fair labor practices, safe working conditions, and respect for workers’ rights.
  • Human rights: Assessing the company’s commitment to human rights and its efforts to avoid human rights abuses.
  • Community engagement: Evaluating the company’s involvement in and support for local communities.
  • Diversity and inclusion: Looking at the company’s policies and practices regarding diversity and inclusion in the workplace

Governance Criteria focus on a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Key factors include:

  • Board diversity and independence: Ensuring a diverse and independent board of directors.
  • Executive compensation: Evaluating how executive pay aligns with the company’s long-term performance.
  • Transparency and accountability: Assessing the company’s transparency in reporting and its accountability to stakeholders.
  • Ethical business practices: Ensuring the company adheres to ethical business practices and has robust anti-corruption policies

How does UUCC incorporate ESG into our investment decisions?

UUCC has a long-standing policy that excludes investing in companies whose primary income is derived from tobacco or firearms.  Recently, we added fossil fuels to that list.

Beyond those exclusions, our primary goal is investment performance.  Our investment manager works from a list of stocks that Huntington analysts think will have good performance over the short and medium term.  But within that list we look for companies with above-average ESG scores.  Huntington uses the ESG scores from a third party that looks at all of the above metrics to assign companies a score between 0 and 5.  The overall average for S&P 500 stocks is about 3.1.  The UUCC portfolio’s current average is about 3.8.

Ultimately, Huntington makes recommendations on which stocks to buy or sell based on both projected investment performance and ESG scores and UUCC’s Investment Committee approves all transactions.

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