One of the hottest topics talked about in corporate board rooms and among institutional investors is ESG investing – that is, investing in stocks with positive environmental, social and governance profiles.
Defining ESG Investing
Many investors take into account the ethics and environmental impact of a company before investing. For these investors, social and governance factors rank highly as they apply to the work environment and a company’s overall goals. For some investors, these areas are just as important as financial variables when it comes to deciding whether or not to invest their hard-earned money into a company. ESG investing entails factoring in a company’s policies and growth in these areas:
- Environmental – potential investors want to know what actions companies are taking to preserve the Earth’s resources and continue business as normal in a sustainable manner. What is the company doing to protect the environment?
- Social – some investors also find it vital to know the relationships that businesses have with their employees and others. Do they allow for equal opportunities? Are they personable and friendly with other businesses, consumers, and the community around them? What part does the company play in the growth and success of the community?
- Governance – also significant to ESG investors is identifying what precautions a company takes to police their board and management team. What company policies and directives are in place to assure appropriate and fair management of the company, and equal opportunities regardless of individuals’ demographics?
Why Does ESG Investing Matter?
ESG is much more than mere talk, however. A recent study from the Callan Institute revealed that the use of ESG factors in investment decision-making doubled to 42 percent in 2019, with endowments and foundations leading the way.
Several reasons explain the growing interest in ESG investing – the most prominent of which are described in the infographic below, An Overview of ESG Investing. For any investor seeking a fuller understanding of ESG, and for any company interested in maximizing its value and ability to attract investment capital, the infographic is an excellent place to start.
It is well understood that Millennials, whose impact on investing is already significant and rapidly rising, place great value on socially responsible business behavior. What is perhaps less understood is how socially responsible business behavior translates into making a company more profitable, and thus, a better investment opportunity.
The infographic is helpful on this issue, too. Companies with strong ESG scoring have less exposure to regulatory fines, shareholder revolts, public scandal, and other potentially devastating, value-obliterating occurrences. In addition, companies that treat employees in a socially responsible way are less likely to experience turnover and more likely to have an engaged and highly productive workforce. These qualities and others make high-scoring ESG companies excellent candidates for strong long-term returns. To learn more, continue reading.