8 Reasons Why ESG Investing is Important

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. 

Unsurprisingly, clients’ demand for Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI) products has increased dramatically. However, the question is why ESG investing is important.

ESG investing is a step towards several global challenges, such as inequalities, deforestation, climate change, etc. Many investors or consumers believe that the coronavirus spread has given ESG investing even more importance. 

Businesses with good ESG practices score higher in 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. 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?

Our planet’s and people’s future has become a priority among economies, governments, and communities. Social inequality, unethical company operations, carbon emissions, deforestation, and climate change are just a few issues across the globe. More and more firms have realized their negative impact on the earth and are trying to minimize it or turn it into a positive one.

Companies and investors are looking for ideas that are effective for their business and good for the environment and people. This is where ESG investing comes into the picture.

ESG investing means assessing an investment opportunity by considering several aspects rather than just money. These ESG factors include how a company operates, impacts the environment, and treats its stakeholders and people.

Moreover, ESG is a non-performance indicator that shows how your investments positively impact the environment, society, or business performance. 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 looking to invest their money in impactful and positive ways to make a real difference in the world.

See Related: Watsco, Inc. ESG Profile (WSO): Is It Sustainable?

Challenges of ESG

Challenge	Description	Solutions	Case Study Insights
Lack of Standardized Metrics	Inconsistent ESG rating methodologies and reporting frameworks across companies and industries, making comparisons difficult.	Inconsistent ESG rating methodologies and reporting frameworks across companies and industries make comparisons difficult.	Companies like Danone and Philips have adopted standardized ESG reporting, improving comparability and decision-making for investors.
Data Quality and Availability	Limited availability of reliable, audited ESG data, with potential for greenwashing and misleading claims.	Encourage third-party verification and assurance. Invest in specialized ESG data providers. Engage with companies for transparent disclosures.	HSBC has implemented a data quality scoring system, helping investors assess the reliability of ESG information.
Higher Initial Costs	Integrating ESG factors into investment processes, conducting due diligence, and accessing specialized data can increase upfront costs.	Leverage technology and automation for cost-effective ESG analysis. Focus on material ESG factors with financial implications.	BlackRock’s Aladdin platform streamlines ESG data integration, lowering costs while enhancing risk-adjusted returns.
Short-Term Performance Concerns	Perception that ESG investing may sacrifice short-term returns for long-term sustainability goals.	Adopt a patient capital mindset. Communicate the long-term value creation potential of ESG investments.	Research by NYU Stern found that firms with strong ESG profiles tend to outperform over longer time horizons.
Limited Investment Options	Encourage the development of new ESG investment vehicles. Consider active ownership strategies to drive positive change.	Europe’s largest asset manager, Amundi, expanded its ESG fund offerings across asset classes and geographies.	Amundi, Europe’s largest asset manager, has expanded its ESG fund offerings across asset classes and geographies.
Market Volatility	Fewer dedicated ESG funds and products, particularly in certain sectors or regions, restrict diversification opportunities.	Maintain a well-diversified portfolio. Employ risk management strategies like hedging. Stay informed about ESG trends and policies.	Investors like Generation Investment Management have navigated market volatility by focusing on long-term ESG themes and active engagement.

Top 8 Reasons Why ESG Investing Matters

The increasing demand for ESG-oriented funds is expected to positively impact global decision-makers’ work. ESG represents the next step in sustainability. By choosing solutions that benefit society and the economy, ESG policies open up more opportunities for local entrepreneurs to shine and earn loyal customers. 

This section outlines why ESG investing is important and what its impact is on the environment and society. 

See Related: Rite Aid Corporation ESG Profile (RAD): Is It Sustainable?

1. ESG is Good for Your Pocket and Planet

There’s a myth that ethics and finance don’t mix. For years, people thought ESG investing would lead to weaker returns. But the data shows that this is not true. Studies from the past few years show that ESG investing achieves similar or 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% and 55%.

See Related:  ESG Investing Courses to Take Today

2. ESG is Linked to Top-Line Growth 

Strong ESG propositions can help businesses expand into existing markets and 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.

Stronger government and community relations enable businesses to have better access to several resources. Moreover, ESG can also drive consumer preference. 

See Related: Wayfair Inc. ESG Profile (W): Is It Sustainable?

3. ESG Provides Better Returns

A strong ESG proposition can provide impressive investment returns by allocating funds to more sustainable and promising opportunities, such as 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, properly accounting for investment returns requires you to begin from the appropriate baseline. Therefore, ensure you’re investing your funds in more sustainable products to leverage the benefits of better investment returns. 

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.

See Related: Watts Water Technologies, Inc. ESG Profile (WTS): Is It Sustainable?

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 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.

See Related: WideOpenWest, Inc. ESG Profile (WOW): Is It Sustainable?

5. ESG Funds Lower the Risk Rate

Another effective reason ESG investing is important is that ESG stocks perform well over time and minimize risk options for investors. If an investor or consumer can evaluate a genuine ESG firm, they will likely take 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.

See Related: Williams Rowland Acquisition Corp. ESG Profile (WRAC.U): Is It Sustainable?

6. ESG Allows You to Make Healthy Long-Term Investment Decisions

As we know, the world is currently facing major sustainability challenges, including inequality, population, climate change, and several environmental risks. ESG practices follow ESG principles and help investors invest in brands that continuously try to protect the planet.

By recognizing that capital allocation impacts the environment, investors can hope to make healthy long-term investment decisions. Through rigorous research, one can identify and invest in businesses with the right ESG metrics to ensure environmental and social responsibility.

See Related: Oracle Corporation ESG Profile (ORCL): Is It Sustainable?

7. ESG Can Uplift Employee Productivity

Another reason 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 satisfaction and 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.

See Related: Wolverine World Wide, Inc. ESG Profile (WWW): Is It Sustainable?

8. ESG Can Result in Cost Reductions

Last but not least, ESG can also substantially minimize costs. Besides other benefits, incorporating ESG practices effectively can help companies reduce greenhouse gas emissions and deal with rising operating expenses.

You can significantly lower utility costs and demonstrate good practice by implementing eco-friendly facilities across your business structure.

These are some effective reasons why ESG investing is important for companies and investors. Hopefully, these reasons convince investors to invest 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 positively impacting 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, though many investors prefer ESG investing, it is still too early to say whether it 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 this trend. To fulfill this evolving appetite, proprietary ESG scores and alternative data providers are being introduced to help consumers or investors make informed, 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. 

See Related: Citigroup Inc. ESG Profile (C): Is It Sustainable?

Millennials are Changing The Face of ESG Investing

Currently, a maximum number of millennials are concerned about environmental issues and ensuring social equity, which will likely impact their investment decisions. ESG investing is a win-win situation for investors as it provides higher returns and a way to contribute positively to the environment and society.

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 complement 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 get 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 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 governance standards. 

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, retail investors progressively working towards investing in ESG-oriented companies and funds are making an actual difference in how 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 businesses and investors. As mentioned, ESG investing primarily focuses on quantifying the efforts made by organizations or investors to benefit the environment or 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 to lower your company’s carbon footprint can help you stand out and 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 more 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. Establishing a specialty in ESG-oriented funds will likely give companies 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
• Everything You Need to Know about Shared Governance