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ESG Investing, Financial Decisions and Analysis

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[University of Pennsylvania]


- Overview

Environmental, social and governance (ESG) is a framework designed to embed an organizational strategy that considers the needs and ways of creating value for all organizational stakeholders such as employees, customers, suppliers and financiers. 

Stakeholders can use ESG company reports to assess material sustainability-related risks and opportunities relevant to an organization. Investors can also use ESG data to assess the material risks facing an organization when assessing business value, in particular by designing models based on the assumption that identifying, assessing, and managing sustainability-related risks and opportunities relevant to all organizational To higher yield long-term risk-adjusted returns.

Organizational stakeholders include, but are not limited to, customers, suppliers, employees, leadership, and the environment.


- ESG Investing and Analysis

ESG analysis has become an increasingly important part of the investment process. For investment professionals, a major motivation for including ESG issues as part of their financial analysis is to gain a more complete understanding of the companies in which they invest.

ESG stands for Environment, Society and Governance. Investors are increasingly using these non-financial factors as part of their analysis process to identify significant risks and growth opportunities. ESG metrics are generally not part of mandatory financial reporting, although a growing number of companies disclose them in their annual reports or in stand-alone sustainability reports. 

A number of bodies, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD) are working to develop standards and define materiality to facilitate the integration of these factors into the investment process.


- Financial Analysis

Financial analysis is the process of evaluating businesses, projects, budgets, and other financial-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is sufficiently stable, solvent, liquid or profitable to warrant a monetary investment.

If performed in-house, financial analysis can help fund managers make future business decisions or review historical trends for past success. If done externally, financial analysis can help investors choose the best investment opportunities.

Fundamental analysis and technical analysis are the two main types of financial analysis. Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security. Technical analysis assumes that a security's value is already determined by its price, but instead focuses on the trend in value over time.


- Financial Decision

Financial decisions are decisions made by managers about the company's finances. These are key decisions for a company's financial health. These decisions can be asset acquisitions, financing and raising capital, day-to-day capital and expenditure management, and more. 

Therefore, financial decisions affect a company's assets and liabilities. They can bring profits, generate income, and access funds and assets for the company. They can also be expenses, the creation of liabilities, and the outflow of funds from the company.


- Opportunity Costs

Opportunity cost represents the potential benefit that an individual, investor or business misses in choosing an alternative. Because opportunity cost is invisible by definition, it is easy to overlook. When a business or individual chooses one investment over another, understanding potential missed opportunities can help make better decisions. 

Opportunity cost is the foregone benefit from an option not chosen. To properly assess opportunity cost, the costs and benefits of each available option must be considered and weighed against other options. Considering the value of opportunity cost can guide individuals and organizations to make more profitable decisions.


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