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The environmental sector of ESG reflects on how a company considers its stewardship obligations in terms of protecting the natural environment. The ‘E’ in ESG considers the company’s use of natural resources and the effect its operations have on the environment, in terms of direct operations and throughout its supply chains. Therefore, a company’s environmental disclosures provide an insight into its efforts to reduce material risks and opportunities for stakeholders. Those companies that fail to anticipate the effects of their practices on the environment may face financial risk. Failing to act or protect against environmental “accidents” can lead to sanctions, prosecution, and reputational damage, which reduces shareholder value.

In the following sections, I describe the different environmental factors that companies need to consider when investing.