The rapid rise in popularity of ESG investing shows us that global sustainability is no more a subject that we can ignore while trying to create long-term goals for our business. Interestingly, it has been observed that though half of global ESG assets account for Europe, the US has shown the strongest expansion in recent times with the possibility of dominating the category in near future. It is expected that the next wave of growth in the sustainability sector would come from Asian countries, especially Japan.
This exhibits the fact that company growth and working towards the benefit of our environment need not contradict themselves. They may and must go hand in hand to create a positive impact on the planet as a whole. Sustainable investing is the newly coined word for thoughtful and socially responsible investment choices. It is based on an organization’s priorities for the betterment of environmental and human well-being.
ESG is the acronym for environmental, social, and governance. These are the three pillars of ESG factors that ensure the enhancement of company behavior and policies to make the world a better place to work and live. ESG is the blanket term for all the factors that lead to sustainable and responsible financial investments.
Let us learn in detail about what exactly ESG investing is, how it affects organizational growth and the importance and challenges involved in it.
What is ESG investing
The core principle of ESG investing is about nurturing company policies based on ESG criteria that are capable of making positive changes in society. It makes you a better investor by helping you to take an investment strategy that follows the rules of ESG metrics.
This will guide you to make investments in companies that rank high in environmental, social, and governance responsibility scales. The scales are determined by third-party organizations and research groups that care about global sustainability factors.
According to ESG investing beliefs, a company’s overall functioning depends on certain environmental, social, and governance factors. By taking ESG performance into consideration, an investor can get a holistic view of the businesses they are investing in. This can help in mitigating risks and identifying opportunities.
via Value Research
How ESG investing affects organizational growth
We must remember that sustainable investing is not just about conscious impact investing for the betterment of our global environment but also is a business strategy that brings in better profit margins. In any industry, the wisest investing decision is to invest in a profitable company.
A business cannot be considered profitable unless and until it serves long-term goals. That being said, no business in the current era can ensure long-term profitable goals without proper ESG accountability.
ESG issues of any company pose a major threat to business operations and profits. Thus, it can be said that investing in a sustainable business is a smart move as such a business would experience lesser business disruptions, can be trusted more than others, and is likely to produce better outcomes in the future.
This means lesser risk factors for stakeholders. Hence, implementing ESG factors while investing might help in:
- Reducing investment risks,
- Decarbonizing the business,
- Attracting end-customers through sustainable brands,
- Attracting more talents toward the brand,
- Increasing the durability of the investment, and
- Producing long-term financial growth.
via Bloomberg
It must be remembered that since investments determine the quality of our future lives, there is no harm in creating a better future through smart investment decisions. ESG investment policies are based on the growing belief that the financial performance of an organization is affected by environmental and social factors.
Importance and challenges in ESG investing
The importance of investing in companies based on ESG-oriented funds lies in the fact that it hugely impacts the way global decision-makers work. ESG is a powerful step in promoting sustainability for businesses.
However, ESG investing has a fair share of its challenges. This section discusses both the importance and challenges of ESG investing.
Importance
Better returns, better environmental impact:
Contrary to the popular belief that ESG is incapable of producing good returns, it has been seen that ESG investing can give the same or even better returns than traditional investing. Post-pandemic it was prominent that people were now much more interested in environmental and social upliftment than ever. Thus, returns from ESG funds saw a huge growth in ESG performance from 27% to 55%.
via McKinsey & Company
Direct link to top-line growth:
Strong ESG policies can push businesses forward not only into existing markets but also help to tap into new markets. By offering more sustainable products produced by proper ESG policies, a company can attract potential clients from B2B and B2C businesses.
A company exhibiting a proper ESG framework may be subject to better access to resources through better relations with the government and community. Again, ESG factors are responsible for driving consumer preferences.
Similar or better results than traditional investing:
If you want to leverage better returns from your investments, then investing in sustainable products or businesses might be the right choice. A strong ESG proposition means allocating funds to opportunities that promise better sustainable opportunities.
For instance, some opportunities might include waste reduction, renewables, and scrubbers. ESG also aids in investments where there are issues of long-term environmental problems.
Positive psychological impact:
Investments in ESG stocks ensure that it makes you feel happy about your responsible investment decisions. You are investing in companies that focus on ethical practices and meet environmental and corporate social standards. Thus, it will make you feel upright in your investments.
Lowered risk factors:
One of the primary concerns of ESG investing is assessing risk factors. ESG stocks not only produce better performance over time but also help in minimizing risk factors for investors.
Long-term healthy investment decisions:
While the world is experiencing major sustainability challenges, ESG investing helps in making correct investments in brands that are making continuous efforts to protect our environment. Through ESG principles, investors can understand how capital allocation makes an impact on the environment.
Cost-reduction:
Cost reduction is a major factor to embrace ESG. Cutting down on greenhouse gas emissions and dealing with the expense by incorporating ESG practices is one of the major factors of cost minimization. Through ESG policies you can also bring down utility costs and implement eco-friendly facilities.
Boost in employee productivity:
ESG investing helps in engaging and retaining quality employees and boosts employee motivation. It gives a sense of purpose to the employee and thus contributes to increasing overall productivity.
Challenges
Lack of transparent reporting:
Obtaining transparent annual reports on ESG metrics can be a difficult subject. This can be due to a lack of the right software, data, and lack of knowledge or expertise to track and present ESG performance to the investors or any other stakeholders.
The right ESG reporting software helps you capture and manage all your ESG data from a wide range of sources in a single system and equips you with better data transparency.
Lack of quality data:
Quality data means that the data must be relatable to the real facts. It is a major issue when we say that some companies may forge data to exhibit their products as more sustainable than they actually are. This is called greenwashing.
Lack of clearly defined rules:
ESG standards do not come with definite forms of rules and regulations. Complying with different regulatory frameworks might be the biggest challenge in adapting to ESG culture.
Lack of standardized metrics:
In the case of ESG reporting, a lack of standardized metrics can result in not being able to correctly evaluate a company’s ESG performance. This may produce disparity in identifying the ESG rating of the company.
Conclusion
While investors nowadays are much more interested in ESG investing, it can be said that companies must enhance their ESG propositions to attract more investors. Investing in ESG issues helps you to improve your brand image and credibility of being a sustainable business. We at Ethos Sustainability Solutions are one of the leading ESG consultants who can help you to make the right investments based on ESG issues.