The days of investing in a company, regardless of its track record in the context of environmental sustainability, human rights, and the treatment of labor, are quickly fading away. ESG concepts, short for ecological, social, and governance, are now taking center stage in the context of investing. As ESG investments continue to gain steam, corporate actions, governmental legislation, and consumer behavior will be impacted.
Corporations are Worried About Investor Perception
Not every individual investor is a social justice warrior. However, a growing number of individual investors are digging deep into the histories of publicly trading companies to determine if they are good stewards of the planet and treat employees as well as people in general with respect. The bottom line is that investors’ attitudes and dollars go a long way in determining how corporations act.
The concern over corporate behavior has paved the way for the rise of the aforementioned ESG-based investments. As time progresses, more and more investors are refusing to put their hard-earned money in the coffers of companies who treat the planet or its people quite harshly. This is precisely why more executives of publicly traded companies are thinking twice before acting in a manner that damages the earth or harms its residents.
The Basics of ESG Investing
ESG has rapidly expanded into a universal concept used by investors to gauge the integrity of corporations. This concept is also used to analyze corporations’ financial performance across posterity through measurement of their sustainability. ESG is centered on environmental, social, and governance factors to determine how advanced specific companies are in terms of sustainability. When enough information about such criteria is amassed, the collected data is combined with an investment process to determine which stocks are optimal for portfolios.
The Goal of ESG Investing
The purpose of ESG investing is to help investors put their money in companies that have sustainable business models as well as practices. This is not to say a company’s environmental impact is more important than its profitability; instead, companies that pass the ESG test are that much more likely to prove sustainable across posterity and outperform comparably wasteful competitors as time progresses. “It will not be long until individual investors around the world not only understand what ESG means but tie ESG information to a prospective investment’s performance, strategy, purpose, and values,” commented Neal Kwatra, CEO and founder of Metropolitan Public Strategies as reported on thriveglobal.com.
Investing in Companies That Value the Environment
ESG investors perform a thorough evaluation of a prospective investment’s impact on the surrounding environment before buying a single share of stock. The sad truth is most business activities pose at least a slight degree of environmental risk for our shared air, water, and ecosystems. Everything from energy efficiency to the use of renewable energy, full disclosure of environmental policies, and the responsible management of waste determines whether the company in question meets ESG criteria for an investment.
The People Factor
Those who follow the stock market are well aware that plenty of businesses utilize unfair labor practices. ESG sustainable investing’s social factor includes a focus on diversity, proper working conditions for laborers, the protection of human rights, and paying a fair wage. Savvy ESG investors take it a step further by gauging each company’s willingness to report progress in each of these areas.
ESG Investing is Here to Stay
Though it might take some time for institutional investors to implement ESG concepts when making an investment decision, industry insiders insist socially, and environmentally-conscious investing is the wave of the future. It is only a matter of time until there is a ripple effect that spreads throughout society as a result of ESG investing. As more and more dollars are poured into well-behaved publicly traded companies, governments will feel the pressure to heighten their standards for environmental protection, labor protection, and human rights as a whole.