There has been a lot of talk in recent years about ESG Investing, but what exactly does it mean? ESG (Environmental, Social and Governance) investing refers to a type of investing that is also known as “sustainable investing”.
It involves putting your money to work with companies that strive to make the world a better place. ESG Investors tend to look at more than just the financial performance of a business, ESG investing involves an assessment of non-financial performance indicators such as sustainable, ethical and corporate governance issues, managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.
Let’s take a closer look at the three criteria used to evaluate companies for ESG investing:
E is for Environmental: What kind of impact does a company have on the environment? This can include a company’s carbon footprint, toxic chemicals involved in its manufacturing processes and sustainability efforts that make up its supply chain.
Environmental positive outcomes include avoiding or minimizing environmental liabilities, lowering costs and increasing profitability through energy and other efficiencies, and reducing regulatory, litigation and reputational risk.
S is for Social, this refers to the company’s impact on society. It consists of people-related elements, like company culture and issues that impact employees, health and safety, Human Rights, integrity, customers, consumers, suppliers, the local community, and society at large.
Socially positive outcomes include increasing productivity and morale, reducing turnover and absenteeism, and improving brand loyalty. Socially minded investors can keep track via annual rankings and lists of “best companies to work for” etc.
G is for Governance, more specifically Corporate Governance. This relates to a company’s Board of Directors and their ability to drive positive change. It also includes issues such as Executive pay, diversity in leadership, Shareholder relations. Any potential Corporate governance issues generally come to the fore every year during Shareholder AGM’s, shareholders have the power to vote on a variety of issues, such as executives pay, director appointments etc.
What are the origins of ESG Investing?
ESG Investing which can also be referred to as Impact investing or socially responsible investing (SRI) has a rich history dating back thousands of years but it really gathered momentum in the 1960 during the Vietnam war.
Protestors demanded that University endowment funds no longer invest in defence contractors or weapons manufacturers.
Two decades later repercussions from Chernobyl and the Three Mile Island nuclear disaster spawned anxiety over the environment and climate change.
Then, Apartheid in South Africa became an impetus to force corporations to divest from South Africa, as a result $625 billion in investments was redirected from South Africa by 1993.
Modern ESG investing has its root in 2006 when the United Nations Principles for Responsible Investment (UN PRI) was released.
Is ESG Investing just a Fad or is it here to stay?
It certainly seems like ESG is here to stay, it has been gathering significant momentum in recent years. In Sept 2020 the World Economic Form drafted a list of ESG Goals. The list includes obligations to report on Greenhouse gas emissions, Water usage, Employment diversity, pay equality etc.
So far over 60 of the world largest companies have signed up to Follow the pledge.
Another great example is in the US where Jo Biden took steps to re-join the Paris climate agreement on his very 1st day in office.
He also pledged to set the US on a path to net-zero greenhouse gas emissions by 2050 with an interim target of decarbonizing the U.S. power sector by 2035.
In the beginning, socially responsible investing was primarily focused on eliminating investments in products that conflicted with personal belief systems or social, moral, or ethical values (for example weapons, alcohol, tobacco, gambling). Now it has evolved into an investing strategy that proactively makes investments in companies that are creating a positive impact.
Inflows into ESG Assets and Investments during 2020 were 96% higher than 2019. ESG investing is definitely here to stay and it offers us the opportunity to do something positive while achieving long term sustainable growth.
Barry Kerr BBS QFA CFP® is the Founder of Wealthwise Financial Planning with offices in Carrick on Shannon, Co Leitrim & Oranmore Co Galway, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141
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