You might have heard of the recent phenomenon of “voting with the dollars,” it is about using your wealth to make investments for the companies you value and believe in. But the only way you can make a real difference is not to select your local bookshop over Amazon, but to put your assets to work similarly. There are techniques, such as ESG investing
The Financial Times Lexicon describes ESG as “a common term being used in financial markets and is used by shareholders to assess corporate behaviour and determine the future financial performance of businesses.” Investors use it to assess companies and predict their economic performance
Money invested in environmental, social and governance, or ESG, is a series of sustainability practices that consider the financial returns of an investment and the overall effects on society and the environment. The ESG rating of an investment test the sustainability of expenditure in three categories: environmental, social and business governance.
There are plenty of trends coming to picture as ESG investment increases in the capital market, from environmental issues to social unrest. The coronavirus outbreak has also raised debates about ecosystems’ interconnectivity with the global economy by generating insightful analysis.
There is evidence, aside from the advantages of building a more ethical portfolio, that ESG funds yield comparable returns as conventional investments and likely carry a lesser risk.
ESG Investing’s Appeal
The percentage of investors interested only in the high returns of a particular investment is lower than those who consider more about the effect of their investments and the importance their resources can play in supporting environmental issues, like climate change, which are also of concern to them.
The millennial generation is among the one group that is especially drawn to ESG investing. They are more likely to prefer a business or buy goods from them when they have credibility for being socially or environmentally responsible, as per a 2006 report called the Cone Millennial Trigger Study. 50% of respondents are more likely to favour a service or product considered environmentally or socially irresponsible by a corporation.
Investing Considerations from ESG
Investing in ESG focuses on “extra-financial” variables or relevant factors. Companies are assessed by accountable creditors using ESG standards as a basis for screening investments or risk management in investment decision-making.
- Environmental variables assess the ecological sustainability of a business and focus on damage to the environment, land degradation, emissions of greenhouse gases, deforestation, and climate change.
- Social factors evaluate how a business handles people and reflects on relationships and inclusion between workers, employment conditions, local populations, safety standards, and disputes.
- Governance factors take a close look at business behaviour and how a corporation is regulated. They concentrate on tax policy, remuneration, gifts and corporate lobbying, fraud and corruption, and the boards’ size and composition.
The decision to invest in ESG can take a variety of forms. We divide sustainability into two groups: ESG and green or low carbon. The Investment ESG process captures more variables, while green is more oriented.
Environmental considerations include waste disposal, water conservation, use of environmental resources, transparency of the environment, effects on society, and emission reductions.
Social factors involve scope statement, attitude in the company, human rights, partnerships between diverse cultures, business ethics, and charitable work.
Factors of governance consider board composition, rewards for staff, the effect on investors, stakeholders’ interests, and the interaction between management and stakeholders.
The emergence of sustainable power, a need to combat global warming, and increasing public supply chain awareness are all leading companies to become brands that support the concepts of ESG investing in the business.