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ESG stands for Environmental, Social and Governance. It is an investment strategy that focuses on investing in companies that are environmentally and socially responsible. Investors who are advocates of ethical investing choose to focus on companies that are positive contributors to the communities they serve. The three pillars of this strategy are the environment, labor, and governance. There are no rules to follow or certain companies to invest in, but it is a strategy that focuses on having an impact in the communities that the money you are investing is coming from and gives back to.
Environmental, social and governance (ESG) investing is based on the idea that it is possible to do well financially by making investment decisions that also do well by the planet and community. With ESG investing, long-term goals such as managing risk and creating value are achieved by factoring ESG considerations into investment decisions.
Perks of ESG Investing
If a firm is committed to environmental aspects and has a superior environmental record, then ESG investors would most likely select it. This could result in an increase in the stock price, since more investors would be interested in the companies that care about the environment. Another benefit is that ESG investors are much more likely to want to hold onto the company’s stocks. Meaning that they wouldn’t be so quick to sell at the first sign of trouble, as some investors might be. As the company continues to do well and makes more of a name for themselves, the company will have a large amount of ESG investors that will keep the stocks from falling too low.
What Topics Fall Under ESG?
ESG involves all the practices that a company follows. ESG ratings evaluate the company based on their financial, environmental and social performance. It is a way to determine whether a company is operating ethically or not. If a company is performing well in the three areas mentioned, it is likely to get a good ESG rating.
|Greenhouse gas (GHG)
|Board diversity and structure
|Waste and pollution
|Bribery and corruption
|Water and energy efficiency
|Health and safety
|Political lobbying and donations
|Child labor and slavery
How Can Organizations Attract Investors Through ESG?
There is no hard and fast rule on the investment strategy of ESG funds. Though these investments are more capital intensive, they have a different investment strategy, and their returns tend to be better. The risk is also higher. ESG funds tend to look at segments that are not known as riskier, and with a long-term horizon. The other important factor that makes Direct Public Offerings of ESG companies successful is the brand name. Companies having better brand equity or are market leaders are more likely to be successful in raising funds from ESG investors.
ESG Investing Trends
Here are some trends in ESG investing: –
- Investors now want to invest in firms that are good for society and the environment.
- Environmental, social, and governance factors are now an important part of the investment decision.
- The number of different types of impact investing products is increasing.
- Impact investing is growing in popularity and the number of investors is increasing.
- Impact investors are helping solve significant social and environmental problems.
Is ESG investing good?
Environmentally friendly investing is a good option for those who want to add a green element to their portfolio but also want to achieve reasonable returns. ESG investing makes it possible for investors to select stocks that meet their social, ethical, and environmental standards.
A 2015 survey by MSCI found that over half of global investors are interested in sustainable investing, with interest highest among millennials. The development of ESG funds has traditionally been hindered by the lack of suitable screening tools for the various ESG issues. But that is changing rapidly.
ESG vs Socially Responsible Investing (SRI)
Investment funds managers tend to use ESG (Environment, Social and Governance) for investment analysis. Eco-Equity funds are one example. These funds are typically non-transactional and focus on negative screening. They focus on socially responsible companies. Socially responsible investing is different in the sense that it is transactional rather than non-transactional. However, both of these focus on companies that have a positive impact on the environment and society at large. For example, funds may screen for companies that adhere to a certain corporate governance standard or for companies with a certain environmental standard. It is worth noting that ESG and SRI funds tend to charge higher fees compared to other mutual funds.