In a world where climate change, viruses, and social injustice are headline news every day, the increasing significance of ESG — organizations’ efforts to tackle environmental, social, and governance issues — may seem unsurprising.
But why is ESG investing crucial — both in terms of the greater good and why we as investors should prioritize this for the benefit of our families and our future.
What is ESG?
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s behavior used by socially conscious investors to screen potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
How Does it Work?
Investors have, in recent years, shown interest in putting their money where their values are. As a result, brokerage firms and mutual fund companies have started offering financial products that follow ESG criteria.
ESG criteria are also increasingly informing the investment choices of large institutional investors such as public pension funds. According to the most recent report from the US, investors held $17.1 trillion in assets chosen according to ESG criteria at the end of 2019, up from $12 trillion just two years earlier.
ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). To assess a company based on ESG criteria, investors look at a broad range of behaviors and policies.
What is Cause-Related Marketing?
Almost 30 years ago businesses all over the world started the process of connecting their business with a worthy cause (the “s” in ESG) the Cause involves a collaboration between a for-profit business and a nonprofit organization.
In an age where transparency is vital to their bottom line, businesses are realizing that consumers are concerned with their impact on society and now also on the environment. Consumers expect brands to be socially and environmentally responsible.
- 70% of consumers want to know how brands are addressing social and environmental issues.
- 46% of consumers pay close attention to a brand’s actions.
Typically, a brand’s association with a cause will boost its corporate social responsibility. The cause, in exchange for their ethical contributions to the collaboration, creates more awareness for their organization.
Why is ESG Growing in Importance?
As companies across sectors embrace the triple bottom line concept — the philosophy that social and environmental issues should be of equal concern as profits — the profile of ESG has become elevated. All three elements of ESG: environmental, social, and governance are seeing increasing scrutiny.
Climate concerns are accelerating a desire for sustainable finance, a concept that’s becoming embedded in our consciousness, driving businesses in all sectors to review their practices as well as their investment decisions. Similarly, we recognize the need to build sustainable supply chains ‘ which tackle environmental and social risks.
Businesses’ social concerns include issues like workforce diversity, where performance is increasingly under the spotlight, and modern-day slavery. Both in leadership and throughout the organization, the benefits of inclusive and diverse businesses are becoming apparent.
Meanwhile, organizations’ governance — how they keep themselves honest on the above and regarding all other areas of operations — is scrutinized to ensure they live up to their promises. Not only are investors becoming more activist on ESG matters, but customers, employees, and even suppliers are also increasingly focused on working with businesses that demonstrate strong ESG credentials.
Why Should We Prioritize ESG Investing?
Sustainable businesses will emerge even stronger from the crisis. During times of crisis, investors used to retreat into tried and trusted safe havens, such as gold or long-dated government bonds, while sustainable investing was viewed as a fashion or something of luxury during uncertain times.
This thinking belongs in the past. Companies taking care of their stakeholders while monitoring externalities are benefiting from their commitment. Funds investing in companies with substantial environmental, social, and governance (ESG) policies have outperformed their benchmarks not only this year but over recent years. From a risk management perspective, backing those companies is logically the right decision.
And this is just the start. We are already witnessing a major change in corporate behavior: hundreds of companies have been forced to publicly reassess their relationships with their customers, employees, suppliers, and the wider community. Recent research has evidenced that those who performed well during the height of the COVID and Ukraine crisis have demonstrated superior product, health, safety, and workforce policy scores. ESG-compliant firms will be well placed to emerge stronger from this crisis.
“The earth is what we all have in common, so we all need to look after it.” Therefore It makes sense to invest in ESG-compliant investments.