Investing with a focus on the environment, social responsibility, and governance (ESG) is increasing in popularity amongst investors as they work towards aligning their values with their portfolios. ESG investing considers the long-term impact of investment decisions, not only the bottom line. As societal pressures and action against climate change continue to drum attention in the news, the focus on sustainability and investing in our planet is more prominent than ever, making ESG investing a hot topic.
The Importance of ESG Investing
There is a growing appreciation amongst investors that companies who abide to ESG standards are better equipped to generate long-term value for shareholders whilst simultaneously bettering the environment and our society. ESG investing takes a more holistic approach to investing, prioritising long-term impacts of investment decisions and company operations instead of short-term profits.
The Attraction of ESG Investing
According to a report by PwC, ESG investing is set to grow massively within the investing community. The report predicts that ESG investment will soar by 84% to $33.9 trillion by 2026, equating to 21.5% of total assets under management or more than $1 for every $5 invested. This shows that ESG investing is no longer a niche trend but a huge influence in an investor's decision and a major factor of the investment landscape.
One reason for the growing popularity of ESG investing is that this form of investing has continuously demonstrated both financial and non-financial benefits for businesses and investors. Data suggets that companies with strong ESG standards experience better profitability, stronger financial performance, a more engaged following and happier employees.
Another reason for the growing popularity of ESG investing is that it has become much easier for investors to access ESG investment opportunities and to research the history of a business before making an investment decision. Many asset managers and investment firms are now offering ESG funds, making it easier to invest in innovative and impactful companies. Additionally, new technology platforms like OnMarket are making it easier for individual investors to access sustainable and impact investment opportunities, such as Hydrowood.
Finally, climate tech funding has achieved an all-time high, with 25% of all venture funding globally going into the sector (according to the same PwC report). This demonstrates the growing interest in sustainable and climate-friendly technologies, which continues to drive the growth of ESG investing amongst retail investors, professional investors and high net worth investors. For example, a company like Hydrowood who has a negative carbon and climate friendly technology upholds ESG practices.
A Deep Dive into factors of ESG Investing
Environmental factors that fall into ESG include climate change, pollution, and natural resource depletion. By investing in companies that operate in an environmentally sustainable manner, investors can help reduce the impact of business operations on environmental issues and contribute to a sustainable future. For example, companies that work to reduce their carbon footprint by adopting renewable energy sources may be better positioned to succeed in a future where environmental precautions, laws or regulations are implemented for businesses. Therefore, by investing in these companies investors could see a better, long-term return on their investment whilst also supporting sustainable practices.
Social factors that fall under ESG include employee diversity, income equality, philanthropy, labor practices and community relationships/ties. By investing in companies that are socially responsible, investors can help reduce issues occurring within our society whilst also encouraging a more prosperous future. For example, companies who focus on diversity and inclusion amongst their employees may be better positioned to problem solve and strategise for growth, attracting talented employees and retaining loyal customers. Therefore, investors in these companies may see a greater return on their investment whilst also bettering the day-to-day of individuals.
Finally, governance factors that fall into ESG include executive and board compensation, compliance policies, company policies and shareholder rights. By investing in companies with good governance practices, investors can support organisations who are transparent, take responsibility and are accountable for their actions. For example, companies that action independent board oversight, shareholder engagement, and ethical behaviour may be better positioned to scale successfully, due to their well thought out and compliant approach, and may deliver a greater ROI to shareholders. Therefore, investors in organisations with strong, ethical governance encourage other businesses to uphold the same standards and can take comfort in knowing they will receive honest insight on business operations.
Conclusion
Overall, the growth in ESG investing can be attributed to a combination of factors, including the financial benefits for investors and positive impacts for the environment and society, improved access to ESG investment opportunities and the growing interest in sustainable technologies.
As the globe becomes more aware of the urgent need to address climate change and focus on sustainability, ESG investing is emerging as a critical part of the solution.