Understanding the Importance of ESG Investing

Feb 14, 2023

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Introduction

ESG investing is a form of socially responsible investing that takes into account the environmental, social, and governance impact of companies and their activities, in addition to the company’s financial performance. This form of investing is focused on evaluating a company’s policies, practices, and activities to determine its overall sustainability and impact on society and the environment.

With an ever-growing recognition that the world must act to reduce the impact of our activities on the planet, people are now aware that – especially with the environment and social aspects – companies have a huge part to play if we are to improve. This recognition of the impact companies have on environmental, social, and governance factors has led to the growing significance of ESG. This ‘importance’ of ESG factors is driven by different demographies such as consumers, investors, and other stakeholders.

This has led to governments and regulatory bodies getting more involved in the disclosure and reporting of ESG data along with the implementation of policies and regulations to promote sustainability and responsible corporate behavior.

Environmental Aspects of ESG Investing

One of the key aspects of ESG is the environmental impact of companies on the planet. This could be the carbon footprint of the company and measures taken to minimize the harm done to the natural world. Factors such as a company’s use of renewable energy, its efforts to reduce waste and emissions, and its management of natural resources are taken into consideration by investors.

Investors can play a crucial role in pushing companies towards a more environmentally aligned approach to their businesses. i.e., Companies that can showcase a strong track record in the aforementioned areas are considered to be more likely to be financially successful in the long term. Investors also see these companies helping mitigate environmental risks, such as climate change, natural disasters, and resource scarcity. These companies are also perceived to be less likely to face financial consequences from ESG-related risks and better prepared to adapt to changing business environments.

Some examples of companies known to be leaders vis-à-vis environmental sustainability are Patagonia, Tesla, Interface, Ikea, and Unilever. These companies have taken various steps such as using sustainable materials in their products, transitioning to electric vehicles, minimizing waste, operating renewable programs, or operating sustainable agricultural programs.

Social Aspects of ESG Investing

This pillar of ESG involves measuring and taking into consideration the impact of a company’s activities on society, communities, and workers. It is getting ever more important for ESG investors that companies have robust policies and practices to promote social responsibility and empower communities and employees. The range of issues under “Social” can be diversity and inclusion, fair labor practices, community engagement, etc.

ESG investing may include taking into consideration factors such as how a company treats its employees, its efforts to support local communities, and its stated policies on human rights. There are significant advantages for companies that have performed well in these metrics such as being better positioned to attract and retain top talent, in addition to building stronger positive relationships with communities and stakeholders.

Examples of companies that have scored high in the social aspects include the likes of Salesforce which is known to have a strong commitment to diversity and inclusion in addition to being a leader in advocating for social justice and equality. Another example would be Ben & Jerry’s which is a strong supporter of fair labor practices and promoting social and environmental responsibility. The progressive Vermont ice cream maker is known to routinely voice its thoughts on social justice issues.

Governance Aspects of ESG Investing

This is an especially crucial part of ESG investing and factors in the governance structures, policies, and systems implemented by a company to ensure that the organization promotes ethical business practices.

Corporate governance refers to the systems and processes that a company uses to manage its business, set strategy, and make decisions. These are all critical elements of a company’s ability to generate long-term value and be successful.

Some investors keep certain benchmarks in all 3 aspects before investing in a company. They may take the added step of acting as advisors or driving the company towards better performances in ESG, before taking an investment decision. Examples of companies that are known to have strong governance and a commitment to transparency and ethical business practices include Johnson & Johnson, and Microsoft.

Integrating ESG into an Investment Portfolio

Fundamentally, we now understand that investing as a source of wealth has changed. Investors and stakeholders realize that they can now align their investment choices with their values and therefore support companies that take these issues as seriously as they do. Moreover, some studies have shown that companies that are ESG aligned generate higher wealth for investors.

However, integrating ESG into an investment portfolio will require the investor to do their homework and keep the following in mind:

- Educate/Research: Research is crucial as investors need to under ESG investing, the factors that are considered, and the potential impact that companies can have. This research or education can be done online with a wide array of websites, reports, and articles being available to those new to responsible investing.

- Assessing Investment Goals: This would involve the investor to assess their goals and match that with ESG factors that are important to him/her. This would require a comprehensive and holistic understanding of the overall investment strategy which will allow the investor to understand which ESG investments are ideal for them.

- Get a financial advisor: This would go a long way in ensuring that the investor has all the necessary information in hand before investing. A financial advisor can help integrate ESG factors into an investment portfolio and provide additional guidance on the best way to go about ESG investments, mitigate risks, and enhance the benefits of ESG investments.

- ESG Funds: Based on a specific investor’s values and investment goals, there are plenty of ESG funds in the market that can help him/her or factor in material ESG factors into their investment portfolios.

Conclusion

It is safe to say that the trend of ESG investing is growing rapidly across countries in the world. After all, who wouldn’t want to make a difference to society, communities, and the planet by simply putting in a more structured and value-based approach to their investment portfolios?

Moreover, the trend also shows that investors and institutions that take ESG considerations into their decision-making process tend to generate higher returns over a longer period while reducing the overall risk of their portfolios.

As a corporate reporting agency, we at Report Yak, are only too aware of the rising importance of ESG and responsible investments in India. Our GRI-certified content writers and creative design teams are put in charge of getting a company’s sustainability story across to its stakeholders in the most concise and visually stunning manner. You can check out some of our award-winning reports here or feel free to get in touch to find out what we can do for your next report!