ESG is a small acronym that represents a big idea. The idea is that big businesses, corporations, and even individuals should use non-monetary methods to reduce their impact on the environment. Typically, this is achieved through the proper use of material and energy impact and ethical or social impact in any given industry.
Governance is also important, being that it covers ethics, the rights of shareholders, and more. This is why ESG investing is important and why you should pay close attention when you plan to invest.
Why is ESG Important in Investment?
ESG or environmental, social, and governance covers topics that investors will need to research and consider before moving forward with any form of investment.
This can range from pollution prevention to resource management. It also covers the human aspect of an investment, such as paying a living wage, i.e., fair trade labor, and ensuring work conditions are safe, among other things.
Sustainability is perhaps one of the most important aspects of investing in the modern world, with more companies globally moving toward reducing their footprint. The impact of ESG investing can be seen in a global reduction in wastage and the surge in assets related to sustainable funds.
We have put together a list of several reasons why ESG investing is the way forward and why you should invest in ESG today.
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1- Sustainable Investing Is The Future
Sustainable investing is no longer an off-the-wall method, and it is a line of thought that is seen regularly in some of the largest investment firms. The future of sustainable investing is bringing, and the only way to do it properly is through ESG investing.
Many stakeholders and investors of all sizes have made substantial shifts towards the low-bond-yield and low-growth environment, which supports ESG investing over older forms.
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2 – ESG Investing Can Help Mitigate Risk
Risk is always a factor when it comes to investments; however, ESG or sustainable investing can help with management. There is so much uncertainty in the world right now, but sustainable investing has proven to be an effective way forward.
ESG investing results in a company that has a lower chance of running into issues that cause negative press and labor problems, and boycotts are virtually non-existent. It helps to keep the bottom line in black while also putting forth a positive image in the press.
It also helps that ESG-focused investing has a trickle-down benefit and makes it easier for companies and investors to weather turbulent times more effectively.
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3- Good Governance Is Important To The System
In the US, the market crisis of 2008 opens the eyes of investors in both the private and the public sectors. It showed just how important it is for there to be proper governance in terms of conduct and culture in terms of investments.
Corporate governance has always been a topic that regulators paid attention to. However, the 2008 crisis highlighted just how important it actually is. For fixed-income investors, this has never been more true.
With ESG investing, governance and ethics play a big role in every decision-making each move is beneficial for all involved.
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4 – Public & private Partnerships Have Expanded
The collaboration between the private and the public sector started out focusing on housing and infrastructure but has since evolved. Both parties are now deeply involved in both environmental and social issues making ESG investing even more critical.
A quick look at how the EU agency market and the US municipal market is working with the private sector proves how effective and beneficial social investments can be. With sustainable investing on an ESG investing model becoming the gold standard, there will soon be no limit to what a joint effort can produce.
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5 – Climate Change is A Reality
Globally, both governments and ordinary people understand the effects of climate change. In almost all cases, it is also acknowledged. ESG investing methods allow for mitigation techniques to be employed that put funding in the hands of those who are committed to making a change.
The COP21 Paris agreement is an international example of mitigation techniques being put in place to slow and eventually reverse climate change.
Private initiatives in the form of sustainable investment portfolios and effective ESG investing are ways that people, businesses, and investors of all sizes can contribute to making the world a healthier place to live. ESG investing also provides investors with a comprehensive disclosure of climate-related financial risks.
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6 – How & What We Consume Is Influenced By Emerging Tech
Technology is evolving, and a breakneck pace and ESG investing are behind much of the trends. Smart metering, electric cars, online sales, renewable energies, and so much more are becoming the norm instead of the exceptions.
Most sectors are experiencing a shift in the way businesses are run and in the products that are produced and sold for mass consumption.
Companies and brands with massive amounts of resources are more willing to adapt to the consumer’s will, which is on-trend to remain eco-focused and socially conscious.
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7 – Social Media Is Driving The Market
You can see just how much social media power works by looking at its effects on investment. Social media plays a big role in how cultures and generations of people see the world around them and how they interact.
For investors, just having a flashy ad campaign is no longer enough. Brands, companies, and even governments have no choice but to pay heed to the demands of the common man for new regulations.
Ethical and social pressure can lead to sustainable investments, which further highlights the ESG investing impact.
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8 – Demographics Are Shaping The New Normal
Baby boomers have been shaping the world for a few decades, but now Gen-X and Millennials are taking over the task of influencing what the world will become. ESG investing is being driven by these generations in a way that is shaping financial, business, and even governance landscapes.
For example, the green bond market is growing by leaps and bounds thanks to the younger generations’ backing of ESG and sustainable investing. In general, the field of sustainable finance has grown to match and surpass the traditional markets, and there is no sign of it slowing down any time soon.
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9 – Regulation is King
If you want to know why ESG investing is so important, take a look at recent regulations on a global scale. New regulations are being put in place thanks to ESG considerations.
Nuclear power plants are being shut down, and some countries now have mandatory climate risk reporting mandates and even government agencies that govern subordinated financial debt.
These all increase the thresholds in financial institutions, making ESG investing one of the simplest paths to proper and unhindered growth.
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10 – Global Value Chains Use ESG
Big corporations these days are global, which means that sourcing and value chains are also global. The interconnection is one of the reasons why ESG investing is so important. Value chains are highly complex and involved many players and hundreds of connected entities.
If you wonder what ESG investing really means, break down a value chain into its individual parts. If a value chain is poorly managed, not only is it costly to the corporation, but it also trickles down to being a bad investment and harsh on the environment.
Studies show how and why ESG investing works and that it can keep workers safe, the environment balanced, and keep emissions low to reduce the environmental impact.
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11 – People Are Sticking Around A Lot Longer
In the past, the average person would live to be only 60-70 years old. These days people are living much longer and staying active well into their advanced years. With the rise in life expectancy, sustainability issues will hit our children and many people who are alive now.
ESG investing is a way to combat poor governance, income inequality, climate change, and failing health care in a meaningful manner. Anything that directly affects financial and environmental security is something that should be on the top of your to-do list.
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12 – Energy Sources In The World Are Changing
Climate change is only one aspect of why ESG investing practices are so important. Another is the change in the energy markets. The dependence on fossil fuels has not only caused nations to go to war, but it also has begun to have a negative impact on our environment.
Drivers, governments, and carmakers are clearly telegraphing the demand and the supply.
While oil is still the top seller, there has been a dramatic shift to natural gas, thanks partly to the abundance and the lower cost. Renewable energy is now scalable and much easier to come by for all types of usages, from running cars to powering big industrial machines.
See Related: Investing in Carbon Credits: Do They Leave an Impact?
13 – Performance Is Why ESG Investing Is Growing
Performance is always going to be one of the driving factors in the field of investing. According to studies from many top financial firms, sustainable investing outperforms conventional forms of investment.
Nuveen TIAA, Deutsche Bank, Morgan Stanley, the United Nations, and many others know why ESG investing is so effective. With performance on the rise, investors are able to see it firsthand.
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14 – Investing Sustainably Drives Performance
ESG investments have been proven to have good performance. Companies that practice sustainable investing are in the top quintile and outperform traditional investment by leaps and bounds. Social sustainability has turned out to be less volatile, with more than 75% of sustainable equity funds ranking among the top in their categories.
Conventional index funds are losing popularity and also have shown rather lackluster performance in recent years. According to recent investor surveys, the improved performance of ESG investments is what has led to the gradual switch over to sustainable investing.
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15 – Fund Companies Are Introducing High Numbers of Sustainable Funds
Another reason why ESG investing is so important is that every company is now getting into the game. Large fund providers such as Fidelity and Vanguard, among others, have launched many ESG products. Aside from the big names, there are a large number of new ESG funds hitting the market on a regular basis.
In the first 6 months of 2020 alone, over two dozen never before seen sustainable funds hit the market. For the past six years, the market has seen a minimum of 20 new sustainable fund launches each year, which will only increase as popularity grows.
The majority of funds also include ESG concerns in their investment process, which is as close to full conversion as can be expected for existing funds.