ESG is a new and growing factor in investment decisions as more and more investors look beyond traditional bottom lines. ESG stands for Environmental, Social and Governance, and many companies are now incorporating these factors into their business strategies. The purpose of this article is to introduce you to ESG investing and to give you an overview of some of the important considerations that can affect your investment decision-making process.
A collective awareness
Insider trading, natural resource depletion, worker exploitation and a host of corporate debacles have recently made headlines. For nearly 20 years, economists and the media have been telling us that we live in a global economy. When companies commit serious breaches, the news travels around the world, causing Wall Street to react.
A movement is underway to make a positive impact through the power of the financial market. In 2006, the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact began developing Principles for Responsible Investment (PRI) with the aim of getting leading financial organizations to sign on to them.
This initiative identifies three categories of concerns:
One approach is to increase the flow of information across organizational sectors by broadening awareness of environmental, social responsibility and corporate governance (ESG). Central to the program is the idea that ESG issues can impact a company’s financial health. In addition, institutional investors have a fiduciary duty to consider ESG factors.
A number of terms are used to describe responsible investing, including socially responsible investing (SRI), corporate social responsibility (CSR), sustainable investing and green investing.
Investors often wonder if the growth of their portfolio will be compromised if they follow sound financial practices. After all, our goal is to preserve and grow wealth.
Since the typical approach to responsible investing is to first identify companies that are strong investments for financial reasons and then evaluate their ESG performance, those that survive this scrutiny and stand out from the competition are more likely to succeed in a global marketplace.
How long has it been around?
Socially responsible investing has been around for over 50 years. It’s likely that it has been practiced in some form for much longer than that. However, it is coming to the forefront of the financial market, and the time to consider environmental issues before investing will become the norm in future investment practices.
ESG concerns will be a product, and the investor will be a consumer. Companies operate to make money, which is not inherently bad. Companies that view sustainable business practices as a simple item to sell will benefit. Green products will be marketed, over-promised and under-delivered, but the overall result will be a step forward.
Define the concerns that are most important to you in a personal responsible investment policy; Review your current portfolio holdings; Seek professional help. If your current investments do not meet your personal ESG criteria, you will need to make adjustments. Unfortunately, many financial advisors are not aware of this issue. That’s why it’s so important for financial advisors to be informed and trained to change this.
To learn more about Esg’s sustainability reporting, don’t hesitate to ask the professionals in the field.