What is ESG Investing?

The Environmental, Social and Governance investing or ESG refers to the class of investing which is also called the “sustainable investing.” 

What is ESG investing? This is the umbrella term that is used for the investments which seek some positive returns as well as long-term impacts on the environment, society, and performance of the businesses. 

There’re so many categories of the sustainable investing. These include the ESG, socially responsible investing (SRI), impact investing, and values-based investment. 

There is one more school of thought that puts the ESG under some umbrella term of the SRI. Under the SRI are actually ESG investing, ethical investing, and the impact investing.

Financial Times Lexicon has defined the ESG that is “the generic term which is used in the capital markets and also used by the investors for evaluating the corporate behavior and for determining the future financial performance of different companies.” 

This is basically used by the investors in order to evaluate the corporations and to determine future financial performances of different companies. 

This adds that the ESG “are actually a subset of the non-financial performance indicators that include ethical, sustainable, and the corporate governance issues. They are for managing the company’s carbon footprints. They also ensure that there’re systems in place to make sure the accountability.” 

They’re factors in the investment considerations. They are used in the risk assessment strategies that are incorporated into the investment decisions as well as risk management processes. 

According to the Environmental, Social, & Governance Issues in Investing: A Guide for Investment Professionals, “There’s a lingering thought that a body of the empirical evidence actually shows that the ESG considerations badly impact the financial performance.” 

This also adds that “for the investment professionals, there is the main idea in a discussion of the ESG issues and that is systematically considering the ESG issues would lead to even more detailed investment analyses & well-informed investment decisions.”

ESG Issues

The ESG refers to the environmental, social, and governance issues which any investor might consider while making some investment. Here are some examples of the ESG issues.

• There are environmental risks that are created by the business activities. These activities have actual and potential negative effects on land, air, ecosystems, water, and human health. The company environmental activities are considered as the ESG factors that include decreasing emissions & climate impact, preventing pollution & managing resources, and execution of environmental reporting. The environmental positive results also include litigation & reputational risk, minimizing or avoiding environmental liabilities, and decreasing regulatory, decreasing costs & increasing profitability by energy & some other efficiencies.
• There are social risks which refer to the effect that several companies might have on the society. They’re also addressed by the company social activities including promoting health & safety, protecting human rights, encouraging the labor-management relationships, and focusing on the product integrity. The social positive outcomes also include decreasing turnover & absenteeism, growing productivity & morale, and enhancing brand loyalty.
• The governance risks actually concern the way many companies operate. This addresses areas that include corporate brand independence & diversity, excessive executive compensation and corporate risk management by different company governance activities. These activities include increasing diversity & board accountability, securing shareholders & their rights, and also reporting as well as disclosing the information. The governance positive results include the aligning interests of management and shareowners and also avoiding the unpleasant financial surprises.

What is an Appeal of the ESG Investing?

There are so many investors that are not just interested in some financial outcomes of their investments. Rather, they are interested in the effect of these investments too. 

Also, there is a crucial role these assets that could have in promoting the global issues that include the climate action.  A demographic which is actually much attracted towards the ESG investing is the millennials. 

A study named as Cone Millennial Cause Study was conducted in the year 2006. This study revealed that the millennials are most likely to actually trust some company or even buy products of a company when that company has a very good reputation for being environmentally or socially responsible. 

Also, half of those surveys are most likely to turn down the service or the product from that company that is perceived to be environmentally or socially irresponsible.