Why is ESG relevant in ethical investing?
This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.
The COVID-19 pandemic has reinforced the importance of ESG issues and accelerated the transition to a more inclusive capitalism. Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.
ESG investing reflects an approach to ethical decision making known as the common good framework. Those who appeal to the common good claim that we ought to cooperatively work towards establishing systems, institutions, and environments that benefit all stakeholders.
ESG criteria give investors a holistic risk lens to evaluate a business or investment's key ESG-related risks. ESG analyst scores and investment ratings are designed to capture and reflect an investment's ESG risk profile.
While sustainability, ethics and corporate governance are generally considered to be non-financial performance indicators, the role of an ESG program is to ensure accountability and the implementation of systems and processes to manage a company's impact, such as its carbon footprint and how it treats employees, ...
ESG frameworks are important to sustainable investing because they can help individuals or other corporations determine whether the company is in alignment with their values, as well as analyse the ultimate worth of a company for their purposes.
Successful companies are implementing ESG strategies that increase financial, societal, and environmental impact as well as ensure long-term competitiveness.
ESG principles emphasize the need for corporations to operate responsibly and sustainably. Corporate ethics is at the heart of these principles, encompassing a company's moral compass, adherence to legal and regulatory standards, and commitment to social responsibility.
What is ESG Investing? Unlike ethical investing, where you exclude companies associated with negative outcomes, in ESG investing, you choose to invest in companies with high environmental, social and governance scores regardless of whether these companies are associated with negative outcomes.
ESG – short for Environmental, Social and Governance – is a set of standards measuring a business's impact on society, the environment, and how transparent and accountable it is.
Why should investors care about ESG risks?
Sustainable or Environmental, Social and Governance (ESG) investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than the broader market.
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
Environmental, Social and Governance matters of any business are interlinked with each other and with the current COVID-19 pandemic, ESG has gained a greater importance among investors, policymakers, and other key stakeholders because it is seen as a way to safeguard businesses from future risks.
ESG has become revenue-critical as investors and stakeholders require businesses to disclose how environmental, social, and governance issues – including risks and opportunities – can impact an organisation's long-term performance.
ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.
The business community is experiencing significant shifts around ESG priorities driven not just by Covid-19 but also by the economic downturn, social unrest and extreme weather events. “For consumers, ESG issues are influencing what companies they work for, buy from and invest in.
Some supporters think the term has become so broad as to lose much of its meaning. Many point to the prevalence of greenwashing, which is when companies exaggerate the environmental benefits of their actions. Other criticisms focus on the way fund managers rank companies by how they're performing on ESG factors.
Many companies and shareholders often overlook the full implications of not adhering to Environmental, Social, and Governance (ESG) standards. Even if you might not place much value on ESG, those who support your business do—and they won't hesitate to make their feelings known.
ESG isn't just a buzzword; it's a framework for responsible and sustainable business practices. It encompasses three core pillars: Environment: Minimising environmental impact through responsible resource management, reducing carbon footprint, and adopting sustainable practices.
It places corporate directors and fund managers in the precarious position where the utilization of ESG and ESG investing is a breach of fiduciary duty, leaving them liable to civil action.
Who is behind ESG?
The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).
Environmental, social, and governance (ESG), are a set of criteria used to evaluate companies' commitment to sustainable operations. In practice, these criteria could involve adhering to worker safety practices, finding ways to maximize energy efficiency, or ensuring diversity among a board of directors.
| Pros | Cons |
|---|---|
| Can help investors diversify their portfolio | ESG funds may carry higher than average expense ratios |
| May reduce portfolio risk | ESG investing is still a fairly new concept and there isn't a ton of reporting on performance |
Many academic studies have investigated the relationship between ESG ratings and stock returns. They offer no conclusive evidence that investments that are based on ESG criteria outperform those that are not. Some studies find that good ESG performers earn higher stock returns while other studies report the opposite.
While ESG investing operates as a framework to assess material risks and opportunities for firms, impact investing is an investment strategy that seeks to first and foremost create a specific, measurable social or environmental benefit.
