Why Invest in ESG? 5 Reasons For 2021
Investing has long been a part of the wealth accumulation process. Funding the launch or continued growth of companies and businesses is a vital aspect of world economies. As investors seek new opportunities, a more granular focus on the sustainability and social impacts of business operations has gained importance. Environmental, Social, and Governance (ESG) investing serves to put those factors at the forefront of investment decision making.
What is Environmental, Social and Governance (ESG) Investing?
Environmental, Social, and Governance (ESG) investing is a new way of approaching business investments. Traditionally, investors focused on a narrow set of criteria — namely, the current and past performance of a company and its ability to generate profits or financial returns — to determine whether the investment was of value. As climate change, social upheavals, and responsible business practices have impacted the world economy, a more sustainable investing strategy was called for. This is ESG in simple terms. ESG issues that investors evaluate include:
- Greenhouse gas emissions
- Racial disparities in pay and equitable treatment
- Human rights positions
- Pollution and toxic byproducts of manufacturing
- Corporate management practices
- Diversity in the workplace
- Animal welfare
- Discrimination based on gender and sexual orientation
ESG is ethical investing, and is based closely on a company’s position on the above factors as well as how it is managed. The goal of ESG is to provide sustainability and long-term performance in the investment process.
The Case for ESG Investing
Sustainable practices in corporate operations is an important aspect of the modern business environment. Instead of solely focusing on the bottom line — the generation of profits above all other factors — modern business owners understand they must be stewards of social and climate issues as well. The climate crisis is particularly alarming, with pollution and carbon emissions hastening the warming of the planet. Rewarding the companies that take their stewardship seriously is one of the key aspects of the responsible and sustainable ESG model.
Historically, investors believed that investing in companies that put environmental and social concerns first would be a recipe for poor returns. Sustainable and responsible business practices were seen as too expensive, ultimately impacting the ability of a given company to maximize profits. It was not until the beginning of the 21st century that ESG demonstrated its value; consumers are more aware of climate and social issues and tend to support those companies that align with their ideals. By taking advantage of investment products and analyzing ESG factors and ESG data, investors gain significant advantages. ESG investments represent a path forward, putting stewardship above sheer profits and ensuring an equitable landscape for all.
Socially Responsible Investing
A core principal of ESG is the concept of socially responsible investing (SRI) that are making positive contributions to social issues or the protection of environments gain business advantages while those with negative screening factors like pollution spills, discrimination, or other negative impacts lag behind.
SRI goes hand in hand with ESG. In fact, ESG integration into investment management is a valuable addition to the concept of being socially and environmentally responsible. An investment portfolio heavy on companies that adhere to social and corporate governance (ESG factors) tends to perform better, on average, than a similar portfolio that includes companies with negative factors. Funds raised by investors help responsible companies to grow, further generating opportunities for positive changes in social dynamics and in environmental issues.
Investment Advice for ESG
The investing market is fraught with risk. Careful analysis of a company’s performance is a key evaluator, but today’s world demands more than focus on the bottom line. By doing research into how a company runs its operations, how it responds to social and environmental issues, and whether it encourages diversity in the workplace all influence how investors respond. Stock in those companies that adhere to responsible stewardship of these issues is no guarantee of future profits, but studies have shown tremendous value in these investment vehicles. America and its markets are beginning to put values first, providing a positive outcome for sustainable investing. Impact investing is the cornerstone of ESG, which has demonstrated financial benefits that spur the continued growth and adaptation of company operations to a brighter, more inclusive, and more responsible future.