While the bottom line matters a lot in the corporate world, especially in the current corporate climate, it is not all that matters to investors. And companies are taking note of this trend.
More and more, investors are putting their money in companies for reasons beyond simply financial performance. Increasingly, investors want to promote sustainability and social equity with their financial power, and they’re doing it through so-called ESG investing (aka taking environmental, social, and governance factors into account).
Women and millennials were at one time credited with driving interest in ESG assets and, while these groups have a strong interest with 90% of millennials and 80% of women interested in ESG strategies, ESG is today attracting a broader group of investors than ever before.
According to Morgan Stanley, sustainable investing has gone mainstream in the United States. The firm anticipates both a growth in client demand as well as returns. Not only is ESG investing increasingly popular, it’s increasingly paying off. According to the IMF’s October 2019 Global Financial Stability Report, the performance of “sustainable” funds is similar to that of conventional equity funds.
What is ESG investing?
ESG investing is the consideration of environmental, social, and governance factors in investment decisions. These factors extend to many non-financial aspects of business. For example, social factors might include labor practices, talent management, product safety, or data security. Similarly, governance factors might address board diversity, executive pay, and business ethics.
The Calvert Social Investment Fund (CSIF), which launched in 1982, was the first fund to integrate ESG factors with financial analysis. That same year, CSIF became the first mutual fund to oppose the South African apartheid.
Fast forward to today. According to BlackRock, over $1 trillion has been specifically invested in mutual funds and ETFs that are tied to metrics quantifying ESG impacts as of 2018. By 2028, the firm estimates that ESG assets under management will surpass $2 trillion.
Even more, the CGS 2019 U.S. Consumer Sustainability Survey found that more than two-thirds of respondents consider sustainability when approaching a purchasing decision. Even more, they are willing to pay a premium for more sustainable products.
In other words, sustainability practices are very important to investors and consumers alike.
One of the original ESG strategies was divestment. Divestment says that if an investor finds out that a company tests their products on animals, for example, the investor might decide not to keep that investment as part of their portfolio. Instead, they would invest those funds in companies that fit their values.
Over the years, however, investors are increasingly investing by positive screening. Positive screening describes how an investor chooses a specific company because they learn that they are a champion of a sustainability factor that the investor cares about.
These days, investors might combine divestment and positive screening approaches. For example, they might divest from all stocks in fossil fuels and instead positively screen for stocks that support renewable energy.
Why choose ESG investing?
The ability for investors to make ESG decisions is easier than ever. For one, information about each company’s sustainability record is more accessible than ever before thanks to the internet. And, because of so much public interest in sustainability, companies have more sustainability markers and indicators than ever.
Take Keurig, for example. Wildly popular five years ago, the company received serious public backlash over the fact that its plastic “K-cup” pods were so difficult to recycle. In response, the company made its pods more environmentally friendly, committing to fully recyclable pods by 2020. In doing so, it quelled public backlash and increased market penetration.
More than ever, companies know that consumers and investors are watching. Beyond the ability for consumers to take social media by storm about non-sustainable practices, more data than ever is available about the sustainability efforts of companies. This makes proactively positive screening of companies more possible than ever.
And, with consumers and investors watching, companies are setting more ambitious ESG goals than ever. PepsiCo, for example, has plans to achieve 100% renewable electricity for its U.S. direct operations this year. This might help all consumers feel a little bit better when they are munching on their favorite snacks.
And the options are growing.
Are you interested in gender equality? Check out Equileap‘s Gender Equality Global Report and Ranking, which started in 2016 and ranks gender equity in the workplace.
Do you want to invest in companies committed to environmental sustainability? Find out which companies are pioneering efforts on the CDP’s annual A List.
Do you want to support corporate diversity? For the past 25 years, the NAACP has been scoring companies on social equity factors including C-suite hiring, supplier diversity and community engagement. Investing with ESG in mind can be a vehicle for promoting the causes that investors care about and it’s more popular than ever before.
Among all of the lists and rankings available, the Principles for Responsible Investment (PRI) is an independent, international network that promotes the investment in and adoption of ESG principles. Launched in 2005 and supported by the United Nations, the PRI is a baseline for responsible investing that companies can use to measure and compare.
While online data can lead investors in the right direction, investment firms have developed an array of data modeling that can select investments based on their investors’ goals. It’s safe to say that ESG investing is here to stay, and firms and companies alike are taking note by making meaningful investing easier than ever before.
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