Socially responsible investing is becoming more and more popular. ESG investing is arguably one of the most important forms of modern investing. ESG investors are forward-thinking investors who carefully consider a company’s impact and impact on environmental issues, social cohesion, governance strategies, and financial returns. Of course, financial dividends are also important to his ESG investors, but ESG investors are more concerned with the long-term sustainability of a company than with short-term financial returns.
Using non-financial metrics to assess a company’s strength is not an entirely new phenomenon. However, interest in ESG has increased in recent years as markets have evolved to favor companies with long-term growth strategies and viable sustainability goals. Climate change, carbon footprint, the Covid-19 pandemic, business ethics, and other factors are accelerating new investment philosophies for a new generation of investors who prefer more than simple financial returns. ESG metrics may not be rooted in financial returns, but a commitment to long-term goals can help investors assess potential material risks and assess potential future growth opportunities.
The problem with ESG investing is that it is difficult to know how sustainable a company or opportunity really is. Additionally, there are many ways to measure ESG, but they are not standardized. Companies can invite third-party companies to conduct assessments that combine surveys and site visits, or create customized analyses, based on their own assessments. Some research firms delve deeper into specific aspects of ESG, while others prefer a broader perspective. Whether looking at ESG Ratings or his ESG Benchmark Scores, both provide a detailed overview of his ESG risks, opportunities and potential value for the company.
What is an ESG investor?
An ESG investor is someone who recognizes the interrelationships between social, environmental and economic issues. These three issues are highly interdependent, and what affects one greatly affects the other. Simply put, an ESG investor is an investor looking to invest in resilient, future-proof companies and portfolios that can weather any storm and add significant social value to the global community.
In recent years, ESG investment has been in the spotlight. But since 2020 and the COVID-19 pandemic that followed, it has become one of the most interesting topics about investment philosophy. While this was largely due to the market turmoil and ensuing uncertainty, it changed the mindset of many investors and highlighted the importance of resilience.
During the first few months of 2020, $45.6 billion I invested in an ESG fund. About US$30.7 trillion is currently invested in sustainable investment funds. Next 20 years it is clear that many investors are looking to support companies with a strong interest in sustainability, climate protection, social equity and business harmony. As interest in ESG continues to grow, so do financial returns.
In fact, portfolios that actively support ESG are: often outperform companies that do not incorporate ESG factors into their long-term strategy. Interestingly, Morningstar research found that 77% of ESG funds that existed more than a decade ago are still in operation today, compared to 46% of traditional investment funds.
While it’s easy to attribute the renewed interest in ESG investing to the global pandemic and ensuing supply chain issues, as well as other related factors, it’s not just circumstance. In fact, the investment demographic is rapidly evolving and becoming more inclusive. More women and young people entering the investment market, challenging traditional investment norms, bring diversity to the landscape. For example, this new demographic will have different values than traditional investment groups and will have other socially responsible investments focused on climate change protection, social inclusion, sustainability and the common good.
What are ESG investors looking for?
ESG shareholders invest in particular companies or portfolios for a variety of reasons. Some invest because of the aforementioned evidence that companies with a strong focus on ESG generate better financial returns over the long term. Others invest because they truly believe in corporate ideals and how they treat their customers, employees, communities, shareholders, and the environment around them.
But one of the key themes on which most shareholders and investors generally agree is one of simple and often underestimated characteristics. That’s strong leadership. Companies with a clear focus on the ESG pillar, embracing both corporate and social responsibility, and a commitment to reducing their carbon footprint and becoming carbon neutral are often credible forward-thinkers.
In short, a good ESG score is a good measure of a company’s integrity, increasing its value and increasing its influence. In that respect, ESG is a practical measure that can be used to identify a company’s strength, sustainability and overall credibility.
Environmental and Social Governance: Examples
Aside from a company’s overall integrity, potential ESG investors should also pay attention to several key issues within the core ESG pillars.
Broadly speaking, ESG investors look for companies that address the three pillars of ESG: environmental, social and governance concerns. Here are some key issues that ESG investors should pay particular attention to.
- forward-looking climate policy
- greenhouse gas emission reduction plan
- strategies to reduce your carbon footprint
- water saving project
- transition to renewable energy
- recycling practices
- eco-friendly and green infrastructure
- employee incentives turn green
- full compliance with environmental regulations
- supporting workers’ rights
- dedication to employee satisfaction (this includes pensions, benefits, training and anti-harassment)
- workplace diversity
- pay raises and promotions
- strong commitment to customer service
- consumer protection
- ethical sourcing: sustainable products from local providers
- noble mission statement
- addressing local charities and concerns
- advocate for social justice issues
- executive compensation and bonus caps
- transparent and ethical business practices
- diverse and comprehensive management structure
- democratic values
- transparent communication
- no opportunities for potential conflicts of interest
- ethical business practices
- simple “greenwashing” or “social wash”
- full compliance with all national and international laws
Of course, this list is only a snapshot of the many ESG-related issues. For more information, see our separate Environmental, Social, and Governance articles.
ESG: Risk vs. Reward
All types of investments require due diligence on the part of the investor. ESG investment is no exception. Unlike many other aspects of financial reporting, it is not mandatory for a company to disclose its ESG scores. For this reason, prospective investors should take the time to thoroughly scrutinize a company or portfolio before engaging.
Unfortunately, current ESG trends have deliberately misrepresented facts and figures in certain areas. You may have heard the term Green Washing. This is when companies and institutions misrepresent their concern for the environment or distract people from the truth with minor environmental protection strategies designed to blind them from the truth. Social Washing: This is a practice in which a company exaggerates the rights of its employees or the community’s commitment to its project for the sake of reputation rather than the public interest.
Savvy investors must be able to distinguish between legitimate ESG initiatives and unsustainable vanity projects. Fortunately, with the rise of ESG reporting and his ESG benchmarking tools, greenwashing and socialwashing are becoming a thing of the past. Given that sustainability is central to his ESG, the rewards far outweigh the risks when it comes to investing.
Companies that take their ESG principles seriously will look for long-term growth, not short-term gain. Sustainability is at the core of ESG, and companies and portfolios looking to attract ESG investors should allocate capital for long-term gains and invest in businesses to avoid employee dissatisfaction, to optimize portfolios and prevent stranded assets due to premature write-downs. Attract top talent to their cause with forward-thinking strategies and a commitment to goals.
The benefits of ESG compliance far outweigh the risks, and the principles apply to both company management and potential investors.
Read our executive summary on ESG in real estate.
This executive summary on ESG in real estate covers the key things real estate decision-makers need to know from ESG compliance to leveraging ESG as value drivers in their real estate portfolios.