At this point, you’ve probably ditched the plastic straws, and you’re bringing your own bag to the supermarket, right? If sustainability is the name of the game, you want your investments to follow the same principles. That’s where ESG investing come in.
ESG stands for the Environmental, Social, and Governance factors that play a role in a type of investing also known as… guess what? Sustainable investing. It’s a practice that values companies that do everything from actively managing their carbon footprints to ensuring labour laws are being upheld.
These kinds of investments seek to generate positive returns, sure, but also to have a long-term impact on society, the environment, and the mission of the business itself.
What is ESG Investing?
ESG investing consists of only investing your money in ways that promote sustainability. ESG factors are often used by investors who seek to reward and influence a company’s long-term health. For many investors, understanding the ESG factors of a company helps them understand corporate purpose, strategy, and general management quality.
Areas that fall under the umbrella term of ESG factors include:
Greenhouse gas (GHG) emissions
Training and qualification
Maturity of workforce
Revenues from new product
Why choose ESG investments?
Socially conscious investors practice ESG investing not only for moral or environmental reasons but also because they believe that rewarding these kinds of values will support a company’s long-term performance. They’re investing in sustainability itself. And it’s a risk management move. To them, investing significantly in a company with notoriously unsafe workplace practices or a history of oil spills is an inherently fraught investment and won’t pay off in the end.
When ESG was first coined as a term in 2005, it was considered a novel approach, and even today there’s a lingering attitude that prioritizing ESG factors while choosing investments will negatively affect financial performance. But now that sustainability issues are thought of by society as less of an experiment and more of an immediate necessity, most investors agree that ESG issues are a crucial factor when evaluating the financial health of a company. “ESG” is now mainstream investment lingo.
Since ESG factors first became a thing in investment jargon in 2005, major stock exchanges such as the New York Stock Exchange all introduced their own sustainability guidelines, such as the Principles for Responsible Investment (PRI).
More businesses realize that sustainability is an important consideration for them (and for their investors and customers). Today, more than 1,600 members representing over $70 trillion assets under management have subscribed to the PRI. ESG clearly isn’t a niche interest anymore.
But some institutional investors are slow in catching up to the trend. The main argument is that their primary responsibility lies with shareholders, regardless of environmental or social impact. But the evidence showing that ESG issues have financial implications is growing.
In many important markets, including the U.S. and the EU, environmental, social and governance integration is increasingly seen as not just the right thing to do, but a smart financial move.
Pros of ESG Investing
Feeling good about your choices
When you buy organic tomatoes at the farmer’s market as opposed to the watery, pale-red spheres you get at your corner supermarket, on a very basic level, there’s a personal satisfaction in that choice. In and of itself, that’s a positive return. When you invest in a company that successfully uses clean energy or has a great workplace environment, you’re simultaneously investing in your values.
If you plan to engage in ESG investing you’ll have to do research into how the money you invest will be used. For the most part, the process is simple. It’s much like dating: You have to screen your candidates for qualities you find attractive and be on the lookout for red flags. Alternatively, you could choose a predefined portfolio that is socially responsible and ESG friendly. This way, you can save time on research and rest easy knowing your money is being used sustainably.
Supporting companies that share your values (and weeding out those that don’t)
So-called negative screens (the red flags) look out for issues such as corruption, a bad environmental track record, or past workers’ rights abuses. These companies are disqualified as potential investments because they don’t reflect ESG values. By avoiding them and instead investing in accordance with ESG principles, it means that you’re: a) putting your money where your mouth is, and b) rewarding companies that practice the values that are important to you.
Your portfolio doesn’t need a lot of constant attention
Another benefit to ESG investing is that its built-in consistency means that once you’ve set up your portfolios with companies that practice your values, you can pretty much leave the portfolio be —unless one of the companies you’re investing in has suddenly been discovered strangling dolphins or something. But for the most part, investing according to core values means you don’t have to keep checking in on your investments so frequently, and can focus on other aspects of your life.
ESG investing is gaining traction as a sustainable investment practice
Although skeptics say that this kind of responsible investing is a fad, similar to green juice or $120 “cleansing” crystals, it doesn’t look like it’s going away anytime soon. People are demanding businesses to be more transparent in their practices, in part in order to make smarter consumer – and investment – choices. This has given the rise to many socially responsible investment portfolios.
As issues like global warming become more tangible for people around the globe, their financial choices begin to reflect this new reality. Institutional investors are slowly but surely also getting more interested in ESG investing. This only accelerates the presence of ESG into the investment mainstream.
ESG vs Socially Responsible Investing (SRI)
So now that we’ve covered the basics of ESG investments, it’s worth circling back for a second to highlight some differences between ESG vs socially responsible investing.
While it may seem that ESG investing and socially responsible investing are the same thing, the difference is that SRIs tend to be driven by a set of values usually guided by religious or certain societal principles, whereas ESG investments tend to be driven by more generalized moral values. If you’re interested in SRIs, you’re probably going to screen companies that are involved in tobacco or alcohol or pornographic products. ESG factors, on the other hand, are a bit broader and tend to refer more to guidelines that protect human rights and the environment. Nonetheless, most investors use the terms interchangeably.