You may be surprised to learn that ESG Investing has been around for a number of years. While the term was first coined in 2005, there have been several examples since the 1950s where conscious choices were made regarding where to place money.
From investing capital in developing affordable housing projects in the 1950s or creating disinvestment company policies due to ethical considerations such as the abhorrence of the apartheid regime in South Africa in the 1970s, there continues to a growing interest in the concept of selective investment.
The wishes of this type of selective investor have seen a lot more “airplay” in the last decade, particularly with the rise of Millennials as the predominant demographic workforce cohort. Along with the financial outcomes of investments, there is a growing interest in the extra or non-financial aspects of investments that is of particular interest to this workforce demographic. As per the Cone Millennial Cause Study, millennials are more likely to trust a company or purchase a company’s product when the company has a reputation of being socially or environmentally responsible.
What is ESG Investing?
ESG investors consider environmental, social and governance issues when making an investment. They may also be known as a “responsible investor” who generally seeks investments that create positive returns as well as a long-term positive impact on society and the environment.
ESG Investing factors in the financial as well as extra or “non” financial elements as part of the investment screening and decision-making process.
E is for Environment. An ESG investor weights environmental risks caused by business activities that may have real or potential negative consequences to our ecosystem or our health. Pollution, waste, climate impact, greenhouse gas (GHG) emissions, deforestation, energy use and managing resources are key factors in the environment investing equation.
S is for Social. ESG investors examine a company’s impact on society. They review data about an organization’s approach to criteria including, but not limited to: health and safety, labour relations, training and qualifications, human rights, product integrity, employee engagement, retention, and productivity.
The “G” in ESG refers to criteria specific to the way a company is run. Investors review an organization’s corporate brand, any corruption, data security, privacy practices, diversity, the board of directors’ accountability and track record, executive compensation, shareholder rights and disclosure transparency.
A tension still exists
There is a debate among investors that impact and return are mutually exclusive and that ESG investing isn’t able to generate the same returns as investments that focus primarily on an organization’s financial performance.
ESG investors weigh in with the argument that rewarding companies with values of positive moral, environment and social practices also enhance their long-term financial performance. They believe that investing in a company with a history of poor management practices or unethical behaviour won’t yield optimal financial results in the end.
Some may argue that ESG Investing isn’t the smart financial move, but others disagree. With over 50 per cent of the adult workforce under age 45, they’re making it clear that their desire to feel good about their decisions matters not just when it comes to buying organic produce. They want to invest in companies that have a great place to work or have a diverse board of directors and respected inclusivity practices.
Not a Fad.
ESG investing is only gaining traction. Increasingly, people are looking to make smarter investment choices that align with their values. They are thinking about their investment decisions differently.
As a result of the growing interest in ESG Investing, major Stock Exchanges like the New York Stock Exchange introduced sustainability guidelines such as the Principles for Responsible Investing (PRI).
Perhaps traditional investment approaches no longer suffice. The complexities of the current global situation, new risk factors, and demographic shifts continue to drive the interest in and demand for ESG investment options.
There remain a number of factors to consider with responsible investing, but the trend of investment firms incorporating ESG metrics into their investment processes shows no sign of changing course.
We know there is a great deal to consider regarding this topic. Please contact us with your questions and let’s work together and create solutions that work best for you and your organization.