The evolution of ESG investing. Here’s what’s next

The next iteration in the evolving world of ESG investing

Sustainable investing has come into focus as investors direct their cash toward stocks based on so-called ESG factors, but shareholders will need to get involved to create meaningful change at companies through impact and stakeholder capitalism strategies.

Screening stocks to ensure they meet ESG qualifications is only the beginning for investors who want to embrace sustainable investing. Look to activist funds with an ESG focus to see how shareholders can hold boards of directors accountable and create value for society – and investors.

Environmental, social, and governance (ESG) investing is when an investor uses a socially conscious set of standards for a company’s operations to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers and communities. Governance deals with a company’s leadership, board composition, alignment with stakeholders and stakeholder rights. The benefits of ESG investing cannot be overstated. It has changed the focus of investors and executives dramatically to think of things other than just returns and profits. It has led to much more diversity on corporate boards and allowed many retail investors the opportunity to make investments consistent with their values. However, due to its passive nature it has several shortcomings.

ESG investing is still very young and will likely evolve over the next several generations. The first step was changing the mindset, which has clearly been done and continuing to happen. The next logical step is changing behaviors and that requires active ESG investing, which is already happening. By active ESG investors we do not mean investors who actively create their portfolio or any investor who is not a purely passive ETF or index fund. These investors share the same problems as the passive ETF funds. They invest in the best ESG actors and not the ones that need to change. Active ESG (or AESG) investors are investors who actively engage with portfolio companies to induce change to better the environment, social aspects and/or governance. The way to truly create real ESG change is to invest with the ESG investors who have someone in the boardroom.

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In summary…

Sustainable investing has come into focus as investors direct their cash toward stocks based on so-called ESG factors, but shareholders will need to get involved to create meaningful change at companies.

To summarize this article, AESG investment strategies have a larger role to play in ESG investing than they have historically. In the past, they may have been seen as antagonistic to passive ESG investors but now, with the growing recognition of the importance of “E” and “S” within companies, there is room for both styles of investing to achieve their goals. Passive ESG investors manage trillions of dollars but are often not willing or able to participate in company change, so the work is left to AESG investors who can effect real change at companies. A symbiotic relationship has developed where AESG investors broaden the universe of potential investments for passive ESG funds and vice versa. For example, those AESG investors who take board seats at companies expose them to ESG investing for passive ESG funds, and vice versa as well. So, these two means of effecting change in the business world work together instead of against each other.

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The evolution of ESG investing. Here’s what’s next

ESG: The New Way of Doing Business in New Jersey

Business and organizational sustainability is a complex issue in New Jersey, with many stakeholders and perspectives. It’s also an area where the stakes are high – if we don’t get it right, there will be dire consequences for our communities and the planet.

The good news is that more investors are taking notice of ESG issues when they invest in New Jersey companies and organizations. In fact, over the past decade institutional investors have been increasingly incorporating Environmental, Social and Governance factors into their investment decisions. And soon it will be impossible to win any RFP’s without it.

We want everyone (not just big institutions in New Jersey) to be able to incorporate ESG-related risk into their actions because Companies that don’t adapt to these changes will not survive. This change has many companies in New Jersey scrambling to figure out how they can stay competitive and be profitable while also contributing to a better future.

ESG The Report is one solution that helps businesses in New Jersey find their niche in this new landscape by providing information on risks and opportunities related to environmental, social and governance factors affecting them today. Our report offers insights into what investors are looking for from companies in New Jersey and around the globe.

ESG Frameworks provide investors with insight into how companies are performing in terms of corporate governance, social issues, labour standards and environmental impact. Ask about our ESG Frameworks package to help you get started on making your company, department or organization diverse, equitable and inclusive for all stakeholders.