The Top 3 Visible Benefits of ESG Investing
Investing in companies that prioritise Environmental, Social, and Governance (ESG) has become a hot trend, especially in the financial industry. According to a report by PwC, globally, fund managers anticipate that their ESG-related assets under management (AuM), which were USD 18.4 trillion in 2021, will rise to USD 33.9 trillion by 2026. ESG assets are expected to account for 21.5% of total worldwide AuM in less than five years, with a predicted compound annual growth rate (CAGR) of 12.9%.
Companies now recognise the value of ESG investing via sustainable funds because it not only helps them with their ethical values but also helps them develop sustainability strategies and improved corporate governance. By defining ESG risks, the resulting resource investment decisions help with cost savings, lower employee turnover, innovation, retained talent, reduced compliance costs, and risk management, all of which contribute to higher shareholder value.
Climate change, and the enormous amount of carbon footprint data being released globally, have made this realisation possible. Socially Responsible Investing (SRI) and Green Bonds are two specific examples of ESG investing that focus on investing in companies and projects that promote sustainability and responsible business practices. However, some may argue that these approaches are solely driven by ethical considerations, but the fact is that there are real, tangible benefits that can be seen in the context of our environmental and social lives within society.
Here are the main 3 benefits:
1. Visible Environmental Benefit
The first tangible benefit of ESG investing is the positive impact it has on environmental issues. Companies that prioritise ESG factors tend to have lower carbon emissions, more sustainable business practices, and a focus on reducing waste. These companies are also more likely to invest in renewable energy and energy-efficient technologies, which can reduce their reliance on fossil fuels. ESG investing also appeals to a younger generation of investors who are passionate about making sustainable investments that support the fight against climate change and other global issues, as well as getting solid portfolio returns.
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Furthermore, green bonds, which are specifically designed to finance projects that have positive environmental impacts, have become an increasingly popular option. According to international organisation Climate Bonds, their report shows that in the five years before to 2021, the issuance of green bonds increased by 49%, and the green bond market annual issuance could exceed the USD 1 trillion mark by 2023.
By investing in green bonds, investors can be responsible investors, supporting projects that address climate change, promote sustainable land use, and promote environmental sustainability. For institutional investors like pension funds, insurance companies, mutual funds, and sovereign wealth funds, green bonds also promote sustainable investing in general.
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2. Visible Societal Benefit
The second tangible benefit of ESG investing is the positive impact it has on society, attributes that encompass a broad range of ultimate positive social impact. Companies that prioritise ESG factors tend to have better labour practices and employee safety, and a commitment to diversity and inclusion (DEI). These companies are more likely to provide fair wages, benefits, and work-life balance, which can improve the overall well-being of employees.
Companies can consider the physical and mental health of their employees and potential investors in addition to encouraging fair and equitable compensation as part of ESG investment by recognising their need for a remote or hybrid working model. This not only enables the company to reduce resource expenses, but it also makes it easier for employees to communicate sustainable practices and how they impact financial performance with shareholders and younger investors alike during shareholder meetings, a more inclusive investment process.
Additionally, SRI funds often prioritise investments in companies that have a positive impact on the community. Sustainability-themed funds are useful in influencing a company's decision regarding the social ideals it supports and is ready to invest in. For instance, if a business does not want to support tobacco manufacturers, it can invest in companies operating with green technologies or companies involved with reducing their carbon footprint instead. Transparently advertising that investment shift away from sectors deemed harmful can also be seen as favourable, especially among younger investors.
Read more on DEI here: Improving Equality, Diversity and Inclusion In Your Workplace
3. Long-Term Benefit
The third tangible benefit of ESG investing is the potential for long-term financial returns. ESG-centric companies tend to have a lower risk of financial and reputational losses, which means more stable returns for many investors. A focus on long-term sustainability demonstrates confidence in growth past ‘traditional’ short-term horizons, the reward of which can be greater financial returns over time. In fact, studies have shown that companies with strong ESG performance have outperformed their peers in terms of stock market performance.
ESG investing is not just about investing in companies that are ‘doing the right thing’, it is also about investing in companies that are well-positioned for long-term financial success and are contributing to a more durable future for our global economic system. Furthermore, by investing in ESG funds or green bonds, investors can use their financial resources to support companies and projects that align with their personal values and promote positive change.
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Investment Strategy - Takeaway
ESG investing, SRI, and green bonds provide real, tangible benefits for an investment portfolio that can be seen within our own societal lives, now, and as a projection into the longer-term future. Sure, there are definitely long-term financial benefits that will accrue from the trust placed in an investment now that, via published ESG ratings, will have measurable, and measured, positive outcomes for a given environmental or social target.
Socially Responsible Investing Can Be Short-Term
However, more interestingly perhaps is the counterweight to the notion that ‘long-term’ may seem less attractive and contain higher investment risk. 'Short-term' cannot solely equate to 'financial gain', it can also be experienced in community investing opportunities by aligning with funds that create community improvements. For example, local environmentally-distraught areas, biodiversity, civil rights, or the health and educational well-being of children in underserved communities are all ESG issues that can be addressed via ethical funds at the local level.
In short, this is socially responsible investing. ESG integration means that ESG criteria and sustainable practices are 'baked in' to the corporate operating DNA. This investment approach is a truly 'socially responsible investment', simply because it comes from within the local community. If a particular investment yields results in terms of improvement over, say, five years, then that must qualify as 'short-term'. The social impact of such investments can be directly quantified, informing the next tranche of investment.
Local Sustainable Investing
Despite the extent of globalisation we have undergone in the last few decades and the ease of global communication, if we are, to some extent, entering a period of increasing ‘decoupling’ or ‘deglobalisation’, then the upshot may be a more pronounced focus on localised investment opportunities. ESG investing stands to benefit greatly from that shift in focus to what matters visibly around where we live and work, and will help us to better understand that actual impact investing must be based around more than simple ‘ROI’, and instead revolve around the social investment required to generate a sustainable future.
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