There are many reasons why people might want to invest in an ESG fund, sustainable stocks or ETF’s. Some people believe that the world is changing and that companies need to start paying more attention to these issues in order to stay competitive in the future. Others may want to support companies that have good environmental or social policies. And finally, some people may just think it’s the right thing to do. But the best reason is that you can use your money, even if it just a little bit, to make the world more sustainable and make yourself a profit.
ESG investing, or environmental, social, and governance investing, is a type of investment that takes into account the Triple Bottom Line: people, planet, and profit. In this post we are going to take a closer look at ESG investing, why it is growing so quickly, and the benefits to investors.
- What does ESG mean in investing?
- What are the benefits of ESG investing?
- Why do investors want good governance?
- What are 4 of the primary benefits of ESG investing?
- Why is ESG important for investors?
- Is a high ESG score good?
- What is the $30 trillion dollar megatrend?
- What are ESG companies?
- What makes ESG investing unique?
- Who are the winners in socially responsible investing?
- In conclusion your investment portfolio & ESG investments
What does ESG mean in investing?
The ESG approach, as defined by the Invest UK guidelines, is one that prioritizes social responsibility when making financial decisions. Each asset has a different footprint, so to speak, and these can have positive or negative effects on the environment, society, and the economy. ESG investors care about how their assets are impacting all three dimensions.
One reason people love ESG is that it forces investors to think broadly. Instead of just thinking about how they’re going to increase their stock portfolio, ESG investors must consider the impact of their assets on society and the environment. Some might even consider this a good excuse for diversifying their investment portfolios: they can still make some money from stocks, but now it’s tempered by social responsibility concerns.
What are the benefits of ESG investing?
1. Environmental Benefits
We all know that environmental concerns are serious business — but did you know that there are direct financial benefits for being environmentally friendly? Let’s look into some examples.
Many major companies have realized that conserving resources doesn’t just help keep the Earth beautiful — it also reduces costs. Apple, for example, has a commitment to using 100% renewable energy and is now carbon-neutral. By cutting out fossil fuels and switching to renewables, Apple is saving more than $80 million a year. There are many tangible environmental benefits of ESG investing: conserving resources, reducing emissions, promoting water management, etc. If you want to learn more about how these companies benefit financially from their focus on the environment then keep reading.
2. Social Benefits
In addition to caring about our communities, investors interested in social benefits invest with those issues close to their hearts as well as their wallets. Here are some examples: Aligned Beliefs: Investors want to invest their capital in companies that share their values. A company with a vision of improving access to clean water for people in impoverished communities is more likely to attract investors who are committed to the same cause. Impact Investing: Social issues can also be an important influence on what type of impact investing strategy you pursue — making your ESG investments work for good
3. Governance Benefits
Investors are interested in governance structure when they are looking at where to put their money. Many major funds, including the California Public Employees’ Retirement System (CalPERS) and BlackRock have explicitly said they want exposure to both environmental sustainability and corporate social responsibility — which means they hope many companies will catch on quickly with these trends.
Why do investors want good governance?
Investors want good governance because they care about the future of the world and they trust that companies that have good corporate structure have a better chance at being sustainable in the long run. Why? Because they have a history of doing good things with their money and time, and if they’re not doing something wrong then there’s no reason to look deeper into what they’re doing wrong. And lastly, investors aren’t always looking for quarterly profits — sometimes it’s more important to them that companies are stable over time or will never have to go under completely, so they will invest more money in companies with good structure because those companies are less likely to fail.
What are 4 of the primary benefits of ESG investing?
1. Reduced Risk
Investors interested in ESG investing are often looking to avoid companies that have questionable practices or are irresponsible. These companies sometimes have higher rates of failure, which means their stock will have a lower price when you’re ready to sell it – something that is bad for your investment strategy. By focusing on responsible investing, you can reduce the risk of losing money with your investments.
2. Lower Costs
For many investors, fees are a major factor when deciding how to invest their money. Companies that have sustainable business practices tend to be more efficient and cost-effective over time because they don’t need massive advertising campaigns to boost sales or spend large sums on luxury items for their top executives. This means the company’s costs are lower overall, which means
3. Better Returns
ESG investing tends to lead to higher returns in the long run. Why? Investors who avoid companies with dubious business practices can invest their money with greater confidence in other companies. This means their investments are more likely to succeed, which means they’re more likely to get a higher return when it comes time for you to sell your investment and make back some of your initial investment when you first purchased the stock.
4. Market Outperformance
Companies that focus on sustainable business practices frequently outperform their competitors over time because they have stronger reputations, increased market share, increased profits, and better revenue growth prospects. They frequently reinvest their earnings into their company, which means they make more money for their investors — something every investor dreams of.
“Investors want good governance because they care about the future of the world and they trust that companies that have good corporate structure have a better chance at being sustainable in the long run.”
“Companies that have sustainable business practices tend to be more efficient and cost-effective over time because they don’t need massive advertising campaigns to boost sales or spend large sums on luxury items for their top executives.”
Why is ESG important for investors?
ESG can be extremely rewarding for investors. Investors often think about money as the only way to measure success, but ESG helps us broaden our perspective and consider a broader range of measures. It’s definitely a huge topic, so I’ll leave a deeper exploration of its benefits to another blog post. But for now I will say that there are a few reasons why ESG is great for investors.
For one, it helps us avoid risky investments that could have a negative impact on our wallets or the planet. I’m sure we can all agree that’s pretty important. And secondly, if done right, it increases the likelihood of investment success by a lot!
Rather than investing in the status quo, ESG investing targets companies that are thinking about ways to improve their environmental and social impact. It takes some patience to see your sustainable investments pay off—ESG is definitely not a quick buck—but it’s definitely worth the wait!
Is a high ESG score good?
Yes, definitely! A higher ESG score means that the company is disclosing its environmental and social impact and making efforts to improve it. It can range from 0 to 100, but there’s no official cut-off for what companies consider “high,” so just focus on your comfort level with each investment. ESG scores are different for each investor, so find what feels right to you!
What is the $30 trillion dollar megatrend?
One of the most exciting things happening right now is how companies are taking social and environmental issues into consideration. We’re seeing more consumer-driven businesses with a conscience, which means less waste, secure resources, healthy employees, sustainable business practices, and more! That is because it is not just a fad, because sustainability is essential to the survival of our species.
This movement is referred to as “ESG” or “Environment, Social, Governance.” It’s a term used to discuss how corporations can make a smooth transition from thinking about shareholder value only, to also focusing on the environmental and social impacts of their practices. And as you might expect, investors are taking notice—and they’re loving it!
In fact, over $30 trillion dollars will be invested into ESG companies by 2025. That’s nearly 20% of all investments! It might not be necessary for an investor to look for an ESG score to invest, but I’m excited about what this trend means for the future of business and society as a whole.
What are ESG companies?
There are companies out there that perform well on some of the most important social factors affecting large groups of people. Some might say they are best identified as socially responsible corporations, but there is more to it than just being good. For many investors what makes these companies so valuable is their ability to contain costs while also generating profit in a sustainable way over time.
What makes ESG investing unique?
ESG stands for environmental, social and governance-related risks that affect an organization or its financial performance. It’s about understanding the impact all three elements have on how well a business is run. However, when it comes to investments, certain sectors fare better than others when factoring in ESG risks alone.
You may be wondering why you haven’t heard about topics regarding ESG investing before, but according to the United Nations Conference on Trade and Development (UNCTAD) sustainable investment was estimated at $8.72 trillion in 2016.
Who are the winners in socially responsible investing?
Investing in companies that have positive social outcomes will prove to be more successful year after year than those who don’t. That’s why many investors are turning away from fossil-fuel producers, while others are eager to join them even if they stand to suffer losses in the short term. It may take some time for traditional financial institutions like banks or mutual funds to catch up with this trend, but when they do you can expect us all to be reaping its benefits for decades to come.
However, there is no reason as to why you can’t start now by investing in those companies who make it their priority to consider ESG factors within their decision-making process. The first thing you need to do, is learn how to understand the market. Then learn to understand the ESG market.
In conclusion your investment portfolio & ESG investments
As far as you are concerned, when investing in ESG companies it is important to remember that these are still businesses who are also responsible for turning a profit. Therefore, looking at returns is just as important when thinking about whether or not they have done well by their stakeholders in the past. Still there can be environmental concerns with many of them due to practices like hydraulic fracturing, but hopefully improvements will be made over time.
Bottom line: When you consider all three elements together -social, environmental and governance- related factors- ESG investing is basically an approach which values long-term social impact in addition to seeking profitable investments. While certain sectors like fossil fuels may carry more risk than others, new studies indicate that environmental and social constraints actually encourage better financial performance in the long run. ESG investing is a relatively new industry, with experts calling for more research on its full impact. However, if you want to be part of an industry that will likely only grow bigger over time then learning how to invest in ESG companies may be your best bet.
Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for professionals focusing on ESG principles. Their primary goal is to provide resources to help middle market companies, SMEs and SMBs transition to a more sustainable future.