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In recent years, the concept of ESG investing has arisen. If you are planning on investing in a company and are doing a bit of research beforehand, chances are you have come across this term. And if you are having a hard time understanding what this concept is all about, don’t worry. In this article, we explain what is and why you should care about it.
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What Is ESG Investing?
ESG (environmental, social, and governance) investing is a form of which considers both financial returns and the overall impact of an investment. It measures the sustainability of an investment against three specific standards: environmental, social, and governance.
Environmental criteria examine how eco-friendly a company is. Social criteria deal with the relationship between a company and its employees, customers, suppliers, and community. Finally, governance criteria tackle the rights and responsibilities of the company’s leadership.
Although sometimes it’s better to use investment advisory services, amateur investors can do their own ESG investing. If you want to make this type of investment, you’ll first need to be familiar with a variety of ESG factors.
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What Factors Are Important with ESG Investing?
To find a perfect investment opportunity consistent with ESG standards, a potential investor must perform an ESG assessment. Doing so requires investors to examine a broad range of ESG factors, including:
Environmental Factors
- Climate change and carbon emissions
- Air and water pollution
- Energy use
- Treatment of animals
- Biodiversity
- Deforestation
- Natural resource conservation
- Waste management
- Water scarcity
- Compliance with environmental regulations
Social Factors
- Human rights
- Customer satisfaction
- Data protection and privacy
- Gender and racial diversity
- Employee engagement
- Community relations
- Labor standards
- Charity and voluntary work
Governance Factors
- Board composition
- Bribery and corruption
- Lobbying
- Accounting methods
- Audit committee structure
- Executive compensation
- Political contributions
- Whistleblower schemes
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Note that this list is not exhaustive. In fact, are hundreds of factors you could take into account when doing such an analysis. Furthermore, as an investor, you shouldn’t look for a company that excels in all of these factors. In fact, such a company doesn’t even exist. What you should do is pick the parameters you see as important and base your assessment around those.
Why Should You Care About ESG Investing?
If your main reason for investing is making money, you might be skeptical about ESG. After all, it is a unique concept that prioritizes sustainability over short-term profitability. However, ESG has many advantages that you must know about before investing your hard-earned money.
ESG Investing Is Ethical
This benefit is pretty much self-explanatory. Applying ESG principles when investing will help you pick up the most ethical of companies. Namely, they will be eco-friendly, socially responsible, and properly governed. Thus, you can give to society while making money for yourself.
Furthermore, ESG criteria will exclude all of the controversial and problematic companies. For example, the oil and tobacco industries are out of the question. Therefore, you won’t suffer from a guilty conscience when you choose ESG investing.
You’ll Avoid Risky Companies
Even if you don’t care about ethical issues, the criteria for ESG investing could help you avoid high-risk investments. Over and over again, we’ve witnessed stock prices plummeting due to a company’s immoral practices. Of course, there is no way to tell if the same will happen to the company you’ve invested in. Yet, it is far less likely to occur in a company that has a good ESG rating.
A 2019 white paper created by the Morgan Stanley Institute for Sustainable Investing confirms this theory. Namely, it suggests that sustainable investment is much safer than traditional investing. Furthermore, it shows that even during times of economic uncertainty, ESG investments have had a lower potential for loss.
You’ll Enjoy Fairly High Returns with ESG Investing
Contrary to popular belief, ESG investing can bring you generous returns. There are several reasons why this is the case. First of all, companies with high ESG ratings are gaining popularity now. During the last few years, ecological and social issues have become a matter of public interest. Furthermore, people have begun to appreciate the companies that share their mission and values.
Secondly, these companies can produce returns continually. As we’ve mentioned before, investments with low ESG ratings are not very safe. And although they can achieve large returns, they could ultimately lead to large financial losses. You will probably agree that it is better to invest in a company that will make healthy profits on a regular basis.
Finally, not everybody is comfortable with ESG investing, but this makes it even more profitable. Although nearly every investment advisor would tell you to choose an ESG investment, old-school investors are usually reluctant to do so. Thus, ESG-friendly stocks with high return rates are readily available for purchase.
Final Thoughts
The concept of ESG investing is in its youth, but it has a bright future ahead. Ecological, social, and governance criteria are becoming more and more important in the business world. Therefore, it’s a good idea to make investments based on those criteria. Furthermore, ESG investing comes with many benefits. Namely, it’s an ethical, low-risk, and high-return investment.
If we’ve failed to mention something or you have some additional questions, read our impact guide on ESG investing. It will outline more issues that ESG tackles and give you a brief prediction about the future of this concept.
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