Climate change is driving corporations to rethink the role they play in their contribution to sustainability and how we live. However, how does global climate change affect our savings and investments? This article will take a closer look at the term “ESG Investing” and how it relates to climate change, sustainability, and finances.
Environmental, social, and governance (ESG), is an approach to assess the extent to which the corporate sector works to achieve goals in relation to sustainability (Broom, 2022). The approach measures how effective organizations are at enhancing sustainable development. It mirrors the growing sensitivity of how consumers decide where to buy their products from, or which company to support based on the environmental and social impacts of various businesses. Thus, a company’s decision to take part or not in the ESG approach could be a deciding factor for its consumers.
Likewise, ESG is also important for investors who are interested in investing money in companies that are adopting sustainable practices, mitigating risk, and creating long-term sustainable initiatives (S&P Global, 2019). As a result, ESG is shaping how companies do business around the world.
Since 2005 when ESG gained popularity, investors have seen and experienced the impact that ESG has on investment decisions (S&P Global, 2019). ESG encourages investors to think broadly and long term instead of only thinking about how to increase profit fast and short-term. ESG investors do not only consider the financial value of their investments, but also consider how their investments will affect society and the environment (S&P Global, 2019). When all three aspects of ESG are considered- environment, social, and governance, the ESG approach aims to value the long-term social impact in addition to seeking profitable investments (Peterdy, 2022).
How is the Trend Towards ESG Investing?
“ Markets can have a transformative effect on society and can build a better world, and investor focus on sustainability issues has never been greater”Micheal Wilkins, Managing Director of Sustainable Finance
According to the Global Sustainable Investment Alliance “the level of global sustainable investments reached a new peak of $31 trillion at the beginning of 2018, a 34% increase from 2016” (Harty, 2019). The graph below shows that Europe and the United States remain two of the largest markets that have made a considerable contribution to sustainable investments.
Will This Trend Continue?
This growing trend in ESG investing is expected to continue. As investors globally continue to learn and gain interest in the ESG approach, ESG factors are expected to increasingly influence investment decisions. Several global initiatives support this expected growth in ESG investments. For example:
- “Many countries (including Canada) and an increasing number of companies are committing to “net zero” emissions targets by 2050 or earlier” (Cleary, n.d.).
- “During 2021, the Government of Canada announced intentions to issue its first sovereign green bond, with a target of $5-billion Cdn during 2022” (Cleary, n.d.).
- “By the middle of 2021 there had been over $2-trillion US cumulative issuance of green, social and sustainability-linked debt, and it was estimated that green bond issuance could hit $1-trillion US annually by 2023” (Cleary, n.d.).
Although ESG investing is relatively new there are long term benefits and stability for investors and companies that cannot be ignored (Peterdy, 2022). Here are just 4 of many benefits that ESG provides to investors(adapted from ESG The Report ):
- Reduced Risk: Investors that are curious about ESG investing are most likely looking to invest in companies where their practices are not questionable or unreliable. These companies typically will not have a higher risk of failure. Therefore, there is less risk when investing in a company that chooses to practice sustainable initiatives as they are reliable.
- Lower Costs: Investors always try to choose the most cost-effective way to invest their money. When companies make the move to incorporate sustainable business practices, they tend to be more efficient and cost-effective. For example, sustainable companies tend to be more energy efficient, and this will reduce costs and save money for investors compared to companies that do not adopt sustainable practices.
- Better Returns: ESG investments often lead to higher returns on investment, that is investors will see more money returned to them due to the generated income from the company. This means that their investments are more likely to succeed and when it comes time to sell the company the investment will be at a higher selling price than it was when they first invested leading to more money returned to the investor.
- Market Outperformance: Companies that focus on sustainable business practices and initiatives have a better reputation, which will likely be translated into increased market share, increased profits and revenue, and consequently a greater chance of outperforming their competitors. “Investors want good governance because they care about the future of the world and they trust that companies that have good corporate structure have a better chance at being sustainable in the long run” (ESG, 2021)
The approaches to ESG investing will continue to evolve and change. There will be strategies that are more integrated, and use multiple data sources to create different ways on how to practice ESG investing. The expected increase in ESG targets, measurements and criteria, and the move toward climate change adaptation and mitigation will offer more solutions and a greater diversity and experience in ESG teams (S&P Global, 2019).
As ESG continues to gain popularity in the investment community, there will be more tools available to ESG investors such as ESG rating agencies (responsible for evaluating companies’ environmental, social, and corporate governance to determine if they are sustainable or not); as well as sustainability reporting frameworks (used by companies to report the achievements of their sustainability goals) (Peterdy, 2022). These tools will improve the consistency of ESG information and how it is being used and reported to the public.
Interested in ESG Investing? Here are some articles that could be helpful to further your understanding:
Broom, D. (2022, January 20). What is sustainable finance & how it is changing the world | World Economic Forum. https://www.weforum.org/agenda/2022/01/what-is-sustainable-finance/
Cleary, S. (n.d.). Centres and Services – The Institute for Sustainable Finance – Resources – Sustainable Finance Primer Series – What Is Sustainable Finance? Retrieved August 22, 2022, from https://smith.queensu.ca/centres/isf/resources/primer-series/sustainable-finance.php
ESG | The Report What are the Benefits of ESG Investing? (2022, February 10). https://www.esgthereport.com/what-are-the-benefits-of-esg-investing/#What-are-the-benefits-of-ESG-investing
ESG: Going Beyond the Balance Sheet | S&P Global. (2019, October 1). https://www.spglobal.com/en/research-insights/featured/esg-going-beyond-the-balance-sheet
Harty, D. (2019, April 1). ESG becoming “mature” market, assets hit $30.7 T in 2018 | S&P Global. https://www.spglobal.com/en/research-insights/articles/esg-becoming-mature-market-as-sustainable-assets-hit-30-7-trillion-in-2018
Peterdy, K. (2022, July 7). ESG (Environmental, Social and Governance) – Overview and Framework. https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/
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