If you have not heard of ESG yet, then I am quite sure you will do. As the human species becomes more aware of what damage we are doing to the planet, the demand to adopt more environmentally-friendly processes in our lives is growing. So too is the demand to invest in companies that have a socially conscious approach to investing.
The criteria for an ESG Investment is a set of socially conscious standards.
Environmental criteria considers how the company performs as a ‘steward of nature’. This may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals.
Social criteria examines how it manages relationships with employees, suppliers, customers and the communities where it operates. This might include, for example, that the company donates a percentage of its profits to local communities, or encourage employees to perform volunteer work there. The company should have a high regard for company employees’ health and safety.
Governance deals with the company’s leadership, executive pay, audits, internal controls and shareholder rights. Accurate and transparent accounting methods, and the ability for stock-holders to vote on important issues. Also ratification that there are no conflicts of interest in their choice of board members
So does ‘being ESG’ compromise investment returns – the data would suggest not. Socially responsible investing has been around since the 60s and 70s, a time when shareholder value theory was popularised, the essence of that being that a companies’ only social responsibility was to maximize shareholder value, in effect make money for the people holding stock. It was considered by some that if you invested in an ‘Environmentally Friendly’ stock then there would be less returns. Now that there is quite a bit of data around this type of investing, this appears not to be the case, and the returns being achieved do not seem to be compromised by being ESG.
Like any investment it is important to consider risks, term and accessibility needs of the investor but perhaps now is the time that this type of investment strategy will really start gaining momentum, so you may see a lot more of ESG.
This article should not be considered investment advice or an offer of any product for sale, it contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular, strategy or investment product. Information contained has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not an indicator of future results.