Understanding ESG Investing: A Sustainable Approach to Finance
Investing in the future of the planet is even more critical. Investors ask and want better investment solutions. Investments that help and do not destroy the planet we live on.
With 24-hour media, we are more aware of the changes to our planet. It is possible to invest more sustainably. ESG investing helps people to contribute in a positive way.
What is ESG?
ESG stands for Environmental, Social and Governance. It is a growing trend in the investment world. It focuses on improving the ways companies operate.
ESG investors look beyond traditional financial metrics. They want their investments to have greater ESG considerations and more impact. Creating good for society and the environment. They do this by including ESG criteria in their investment process.
Responsible investments can help drive meaningful change by excluding companies with poor ESG scores.
The Four Pillars of ESG Investing
It is essential to understand the four main components of ESG. Originally there were three pillars, but this has now been expanded to four. These are Human, Environmental, Social issues and Governance. The aim is to improve the way businesses operate in these three areas.
These three elements are known as the Four pillars of sustainability. The infographic summarises the main factors for sustainable investing. We have also produced several blog posts on ESG investing.
UN Sustainable Development Goals
In 2015 the United Nations introduced Sustainable Development Goals (SDG). ESG aims to meet the UN’s goals. We have written a blog on the UN SDG. It was renamed the 2030 Agenda as the aim is to improve global goals by this date.
In total, there are 17 UN sustainable development goals. Each one covers a specific area the UN feels should be achievable by 2020. The goals are:
- Goal 1. No Poverty
- Goal 2: Zero hunger
- Goal 3: Good health and well-being
- Goal 4: Quality education
- Goal 5: Gender equality
- Goal 6: Clean water and sanitation
- Goal 7: Affordable and renewable energy
- Goal 8: Decent work and economic growth
- Goal 9: Industry, Innovation and Infrastructure
- Goal 10: Reduced inequality
- Goal 11: Sustainable Cities and Communities
- Goal 12: Responsible consumption and production
- Goal 13: Climate action
- Goal 14: Life below water
- Goal 15: Life on land
- Goal 16: Peace, justice and strong institutions
- Goal 17: Partnership for the goals
“The world faces large-scale environmental, social and Governance (ESG) issues. Investors are asking for more ethical investment strategies.”
Investing with a conscience
In the past, there was a view that ESG investment strategies gave investors lower returns. For some impact investors, this was an acceptable trade-off. Choosing positive change over higher investment growth.
This view is a myth. We can prove investing sustainably has a positive effect on investment returns. Information on a company’s ESG performance is available. Fund managers can use this information to help their investment strategy.
Each investment has an ESG score for easy comparison. Companies that struggle with ESG integration will have a lower rating.
Research companies such as Standard and Poor’s now include ESG data as part of their research. This information is available to professional and private investors. The research is updated each month to reflect on the company’s improvement.
ESG’s scores are on a scale from good to bad. Investors can choose the ESG criteria when selecting investments. Younger and smaller companies are more active in terms of ESG.
Larger, more established companies are reviewing their businesses. They understand the benefits of sustainable business practices.
There is evidence that impact investing can enhance returns and decrease risk. This is because the firms chosen are the “best of the best”.
The Covid-19 pandemic caused a market crash at the start of 2019. Companies with high ESG ratings suffered lower losses than the rest of the market.
Naturally, this strategy does not guarantee higher returns. But it has caused some experts to explore the idea further.
There is an increasing amount of research on ESG Investing. The benefits are compelling.
Research is continuing to back up the ESG story. As the market grows, more information is becoming available.
The Benefits Of ESG Investing
There are several positive benefits of ESG investing. These are:
- Enhancing the worth of those with a stake in the company.
Companies with better ESG practices perform better. They have better operations, cost savings, and risk management. This can result in increased shareholder value.
ESG funds have demonstrated resilience during stock market corrections. An MSCI study compared ESG against traditional indexes.
Three global ESG indexes were compared to the MSCI All-Country World Index.
The ESG indexes performed better through the COVID-19 pandemic.
- Higher ethical standards and oversight for companies.
The economy, businesses, and nature are all connected. Natural Resources contribute $44 trillion in economic value.
Investing in companies that practice good corporate Governance can help reduce investment risks. Most Stock exchanges require listed companies to file annual ESG reports.
- A positive impact to combat global warming.
Many people choose ESG impact investing to fight climate change. Green Investment funds are one such investment.
Sustainable energy, carbon offsets, and forestry are acceptable. ESG is an effective way to combat climate change.
- Businesses that embrace sustainability meet their long-term objectives.
ESG investing trends carry both long-term benefits and risks. Companies must be ready to transition to more sustainable practices.
Investing in ESG-focused companies supports sustainable practices. Long term, it helps with the transition to a greener economy.
- A positive contribution towards workers, society and public image.
Such investing encourages “prosocial” behaviours. Providing increased job satisfaction, production and mental health.
A 2019 McKinsey study revealed an interesting fact about diversity.
Companies with employee diversity are more likely to perform better. This suggests that diversity benefits businesses.
Summary
We understand the importance of sustainable investing. An increasing number of clients opt for ESG-based investments.
At our initial meeting, we will discuss ESG Investing and impact funds. We use this information when selecting your ESG investment funds strategy.
We aim to understand which factors you value the most. As Independent Financial Advisers, we can choose the most suitable investments. By gathering insights into your priorities, we can tailor our approach to align with your financial goals and risk tolerance. Additionally, we specialize in developing investment strategies for beginners, ensuring that even those new to investing can feel confident and informed in their choices. Our personalized guidance aims to create a solid foundation for your financial future, paving the way for long-term success.
To discuss investing in more depth, please get in touch with us.