Over the past few years, people around the globe have been making more sustainable choices in their lives, changing simple things like recycling household waste, living more sustainably to minimize waste, and going for greener ways to travel wherever possible. Naturally, this has started to influence decisions around finances, for instance, Environmental, Social, and Governance (ESG) investing.
It’s not surprising that the demand from clients for Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI) products has increased dramatically. But the question is, why ESG investing is important.
Basically, ESG investing is a step towards several global challenges, such as inequalities, deforestation, climate change, etc. Also, many investors or consumers believe that the coronavirus spread has brought even more importance to ESG investing.
Businesses with good ESG practices score higher in terms of reputation and carry less risk as they incorporate sustainability as their core value. Moreover, ESG analysis can help investors determine a business’ long-term sustainability and any intangible ESG risks arising from these matters.
The reports also show that ESG assets may exceed $53 trillion by 2025. Looking at these statistics, it won’t be wrong to say that ESG investing and social responsibility will continue expanding and impacting how we live.
Whether you know about ESG investing or are just a beginner, this post will discuss why ESG investing is important for investors and businesses. So, let’s take a closer look.
See Related: ESG Investing Trends
Why Does ESG Investing Matter?
The future of our planet and people has become a priority among economies, governments, and communities. Social inequality, unethical company operations, carbon emission, deforestation, and climate change are just a few issues across the globe. More and more firms have started to realize the negative impact they have on the earth and are trying their level best to minimize it or turn it into a positive one.
Companies and investors are looking for ideas that are not just effective for their business but also good for the environment and people. This is where ESG investing comes into the picture.
ESG investing means paying attention to several aspects rather than just money when assessing an investment opportunity. These ESG factors include how a company operates, how it impacts the environment, and how it treats its stakeholders and people.
Moreover, ESG is a non-performance indicator that shows how your investments impact the environment, society, or business’ performance positively. These indicators help investors understand how sustainable a business is and its impact on everyone involved, including employees, customers, and society.
Businesses with ESG or sustainability investing can be attractive to impact investors, ethical investors, sustainability investors, socially responsible investors, or anyone else looking to invest their money to use in impactful and positive ways to make a real difference in the world.
Top 8 Reasons Why ESG Investing Matters
The increasing demand for ESG-oriented funds is expected to have a positive impact on how global decision-makers work – ESG represents the next step in sustainability. By picking solutions that are good for both society and the economy, ESG policies open up more doors for local entrepreneurs to shine through and earn loyal customers.
This section outlines the top 8 reasons why ESG investing is important and its impact on the environment and society.
1. ESG is Good for Your Pocket and Planet
There’s a myth that ethics and finance don’t mix. For years, people used to think that ESG investing would lead to weaker returns. But the data states that it’s not true. In fact, studies from the past few years show that ESG investing achieves similar or even impressive returns to traditional funds.
For instance, the Covid-19 pandemic stated that funds that applied ESG criteria outperformed in the first year of coronavirus, with average growth between 27% to 55%.
See Related: 8 Best ESG Investing Courses to Take Today
2. ESG is Linked to Top-Line Growth
Strong ESG propositions can help businesses not just expand into existing markets but also enter new ones. An appropriate ESG practice can help companies attract B2B (Business-to-Business) and B2C (Business-to-Consumer) clients by offering more sustainable products. It enables businesses better access to several resources through stronger government and community relations. Moreover, ESG can also drive consumer preference.
3. ESG Provides Better Returns
A strong ESG proposition can provide impressive investment returns by allocating funds to more sustainable and more promising opportunities, for instance, scrubbers, renewables, and waste reduction. ESG can also help businesses avoid stranded investments that may not pay off due to long-term environmental problems, like a massive drop in the value of oil tankers.
Most importantly, taking proper account of returns on your investments requires you to begin from the appropriate baseline. Therefore, make sure you’re investing your funds in more sustainable products to leverage the benefits of better returns on your investments.
For example, Marks & Spencer experienced similar benefits when they launched ‘Plan A’ to source responsibly, reduce waste, and help communities, leading the brand to save around $200 million annually. This research highlights the substantial impact of sustainable products on a company’s returns and revenues.
4. ESG Investing Makes You Feel Good about Your Investment Decisions
Another significant benefit of investing in ESG stocks is ensuring that you’re working with companies that are dedicated to focusing on ethical practices, meeting environmental standards, and continuing to meet corporate social responsibility. So, if you want to feel happy and satisfied with the type of companies you’re investing in, ESG investment funds are an excellent option.
5. ESG Funds Lower the Risk Rate
Another effective reason why ESG investing is important is that ESG stocks not just perform well over time but also minimize risk options for investors. If an investor or consumer can evaluate a genuine ESG firm, they will most likely be taking on a less risky investment. Since ESG focused businesses are committed to adhering to government regulations and following a fair ESG framework, they tend to be less volatile and have stronger reputations.
6. ESG Allows You to Make Healthy Long-Term Investment Decisions
As we know, the world is facing major sustainability challenges currently, including inequality, population, climate change, and several environmental risks. ESG practices follow ESG principles and help investors invest in brands making continuous efforts to protect the planet.
By recognizing that capital allocation makes a real impact on the environment, investors can hope to make healthy long-term investment decisions. Through rigorous research, one can identify businesses with the right ESG metrics and invest in them to ensure environmental and social responsibility.
See Related: Oracle Corporation ESG Profile (ORCL): Is It Sustainable?
7. ESG Can Uplift Employee Productivity
Another reason why ESG investing is important is that it can help businesses engage and retain quality employees, boost employee motivation by giving a sense of purpose, and increase overall productivity. Employee satisfaction is entirely linked to shareholder returns.
Also, it has been seen that staff with a sense of not only satisfaction but also connection perform better. Moreover, the more robust an employee’s belief of impact on the beneficiaries of their work, the better their motivation to work in a “prosocial” manner.
8. ESG Can Result in Cost Reductions
Last but not least, ESG can also minimize costs substantially. Besides other benefits, incorporating ESG practices effectively can help companies cut down greenhouse gas emissions and deal with rising operating expenses.
Overall, you can significantly lower utility costs and demonstrate good practice by implementing eco-friendly facilities across your business structure.
These are some of the effective reasons why ESG investing is important for companies and investors. Hopefully, these reasons are convincing enough for investors to start investing in ESG-related funds.
See Related: Why You Need ESG Investing
Does ESG Investing Outperform?
There are multiple debates on whether ESG investing outperforms the overall industry. A poll by Morning Consult states that 69% of frequent US investors say that ESG investing is “somewhat” or “very” profitable, whereas 15% believe ESG investing is “not too profitable” or “not profitable at all.”
Apart from having a positive impact on the well-being of the environment and society, constant ESG integration allows consumers to unlock the potential value of a company and evaluate the associated opportunities and risks. The ESG data also aids decision-making and complements through financial analysis.
Moreover, in my opinion, though a considerable number of investors prefer ESG investing, it is still too early to say whether ESG investing truly outperforms. While there are still issues with a lack of transparency and reporting requirements, new standards and frameworks will likely be introduced over the next decade.
Though the debate is still on whether ESG investing outperforms the market, the coronavirus pandemic has seen a rapid increase in demand among investors for the ESG investment trend. To fulfill this evolving appetite, proprietary ESG scores and alternative data providers are being introduced to help consumers or investors make informed and data-driven decisions.
Overall, ESG investing has outgrown over the past few years, and this trend is likely to continue over the coming years as well.
Millennials are Changing The Face of ESG Investing
At present, a maximum number of millennials are concerned about environmental issues and ensuring social equity, which is likely to impact their investment decisions. ESG investing is a win-win situation for investors as not only it provides higher returns but also serves as a route to contribute to the environment and society positively.
Considering the benefits of sustainable investing, it is high time for investors from every age group to go for ESG investment options. Since more and more organizations or brands regulate their marketing strategies and establish effective corporate social responsibility, ESG investing is set to create a sustainable and profitable tomorrow.
So, if you’re an investor who values the ESG principles and rules, it’s time to embrace responsible and sustainable investing. Investing in ESG companies can be a great way of complimenting your portfolio with capital that showcases your ethics and standards while delivering good returns.
See Related: Top ESG Funds to Invest
Getting Started on ESG Investing
Investors from different regions always have the choice to determine ESG initiatives of varying businesses and make direct investments. However, this could be tedious and time-consuming. Therefore, it is best to take help from professional fund managers. Being in the industry, they have the necessary tools and expertise to analyze ESG initiatives and financial performances together to make reliable or effective investment decisions.
Investing in ESG funds offered by life insurance companies or professional retail money managers can provide you with opportunities to earn good returns and make positive social and environmental impacts.
These funds follow ESG rules & regulations and invest in firms making regular efforts to be equitable, protect society, and have high standards of governance.
Overall, expert fund managers identify brands with the proper ESG practices and help you invest your capital in them to generate higher returns and ensure the betterment of society. Furthermore, with retail investors progressively working towards investing in ESG-oriented companies and funds, they are making an actual difference in the way corporations work.
See Related: How to Get Involved in ESG Investing
ESG Investing: A Great Initiative for a Better Tomorrow
The above information shows why ESG investing is important for both businesses and investors. As mentioned, ESG investing primarily focuses on quantifying the efforts made by organizations or investors to either benefit the environment or at least minimize their negative societal impact.
Being a business owner, showing your commitment to environmental and social responsibility is a smart strategy as most consumers and investors are increasingly looking to invest in companies with a positive impact on the planet and people. Furthermore, taking appropriate steps toward lowering your company’s carbon footprint can help you stand out within your industry and even attract potential investors.
Overall, a better understanding of ESG investing can create a perfect opportunity for you to engage and retain more and more clients across the globe. Also, adding ESG investment funds to your business discussions can enable you to establish deeper and genuine conversations with your potential clients.
These more profound and meaningful conversations can lead businesses to build more robust and long-lasting client engagement and relationships.
On the whole, choosing to establish a specialty in ESG-oriented funds will likely lead companies to a competitive advantage in the coming years.
Other Related Resources
ESG Investing Options: Best Impact Investing Apps
Why Companies Have a Social Responsibility to Investors