In financial terms, ESG aka Environmental, Social and Governance, is a set of criteria by which a company’s ‘character’ can be judged. It is quite like presenting your best self when seeking employment, by investing in impressive qualifications, practicing good habits and demonstrating conscientiousness towards others and your surroundings. For a company, what this means is paying attention to protecting the environment, maintaining good relationships with its stakeholders, and ensuring that the company’s top brass leads through best practices. Wealth managers today pay greater attention to ESG processes when guiding potential investors on investment opportunities, and as a result, transparency in the adopted ESG strategies has become essential so that investments can be accurately monitored. Along with this, companies are encouraged to divulge their ESG practices through reports and statements, in a timely manner.
How is this different to Impact Investing?
Impact Investing concentrates on bringing about positives for society, even if it means that company profits are not maximized. ESG investments, on the other hand, seek to make profits while also enabling social good. Experts believe that with socially-conscious investors on the rise, it will not be challenging to translate such investments into profits.
New developments
According to Nomica, which sells ESG products worldwide, with the increased focus on ESG issues, natural capital finance and natural climate solutions has made its way to the forefront. An indication that people are now more interested in making investments in projects that seek to combat climate change and make environmental protection a priority. IShares ESG Aware, Calvert International Responsible Index Fund, and Pax Ellevate Global Women’s Leadership Fund have been noted as being among some of the best ESG Investment funds in 2023.
In fact, with the growing conversation around climate change and its impacts on the world, the move towards renewable sources of energy is gaining traction. This will undoubtedly steer ESG investors in the direction of projects connected with renewable energy sources like solar and wind power.
Another area that Investopedia highlights in ESG investments is in companies that provide equal pay. According to Forbes on average, women earned less than 17% compared to men in 2022. In dollar terms, women made 82 cents for every dollar made by a man. Women’s salaries were also lower across various industries and sectors and were affected by racial diversity. Forbes quotes The Institute for Women’s Policy Research which predicts that gender pay equity will not become a reality until 2059.
While this is worryingly quite a long way off, it is heartening that in a bid to encourage gender pay equity ESG investors are now also more attuned to companies that offer equal pay to both sexes. This is good news that will hopefully open doors to more companies that have thus far gone under the radar in not offering equal pay.
Furthermore, ESG investors are also leaning more towards companies that have more reasonable Executive compensation, according to Investopedia. In times of economic downturn such as this, it seems unreasonable when the top-tiers of companies are paid handsomely in bonuses while the bottom lines become slimmer and slimmer. Instances such as when England’s crown estate Chief Executive Dan Labbad’s pay was tripled in 2022 to £1.6 million were heavily criticized by both the media and public. Now more than ever, investors are holding company leaders accountable and are shying away from those that do not demonstrate conscientious leadership. In this backdrop, ESG Investing seems to tick the boxes that apply pressure where necessary for businesses to adopt business practices.
On the government’s side, it is notable that the U.S. Labor Department has also called for more investor access to ESG investments in its 401(k) retirement plans. These plans carry tax advantages for those who use it to save, and by making ESG investments more available through this scheme, they become more attractive and a more conscientious investment, overall.
In the US, the value of ESG Investments in 2022 was $8.4 trillion and the market is still growing. Global ESG investment assets were at $2.3 trillion by the end of 2022 and Bloomberg feels ESG assets may reach $53 trillion by 2025 globally. Statistics show that Europe has been at the forefront of driving these investments forward; an estimated 83 percent of ESG fund assets at the end of 2022 has come from the region.
Is the hype real?
Despite all the positivity surrounding ESG investments, there still remains some cynicism about how long it will last. In North America the view is that ESG investments are only a marketing tool and cannot be sustained due to hurdles such as a complex regulatory landscape, lack of strong data and lack of proper products, among others.
Conversely, J P Morgan expects ESG investing to keep on increasing due to product innovation through technology, and companies feeling the pressure to focus on ESG issues. They also believe that as the global landscape moves towards a carbon-free future, that investors will be more interested in energy-efficient sectors and industries.
The future of ESG Investing
With the way forward being sustainability in business and investing, the need of the hour is for better regulations in ESG reporting. More and more countries and regions are targeting ‘green’ initiatives. In Europe, proposals called ‘The European Green Deals’ that look at reducing climate change and sustainable innovation are being implemented. As such, the future of ESG investing seems optimistic, however, its success depends to a great extent on the curbing of ‘Greenwashing’ or exaggerated marketing claims and sound reporting of data. In addition, environmental, social and governance aspects should be studied separately, so that their outcomes are clear and precise. These factors have also been taken up and debated by the US Republican politicians who criticize ESG investing as ‘Woke Capitalism.’ In their view, ESG departs from the conventional financial aspects when considering investing, and is not driven by free market trading. However, advocates of ESG could not disagree more. Their premise is that whether we like it or not, the marketplace is affected by phenomena such as climate change, and if we do not factor these into our financial decisions, we will certainly see these impacting company bottom lines in the future. Are they wrong?
(Anouk De Silva)