What is ESG Investing?
There’s an estimated $125 trillion that circulates the global economy. Made up from liquid assets like physical notes and coins to money market funds, savings accounts and less liquid forms of money, it’s quite literally an incomprehensibly large amount of money.
And that figure doesn’t even include the stock market, which is thought to have a value of around $95 trillion. Global investments in banking and brokerage alone are around $324.2 billion, while the market capitalisation of the stock market was $93.7 trillion at the end of 2020.
It’s difficult to conceptualise just how large these sums of money are. But what if these enormous figures, many of which are poured into investments, stocks, funds and shares, were funnelled towards things that made our world a better place to live in for everyone?
What is ESG investing?
ESG (environmental, social and governance) investing is a strategy that helps guide investors to put their money behind the companies, businesses and firms that are trying to make the world a better place. The strategy relies on independent ratings to assess the impact that individual companies have on the world and how they use investors’ money.
An increase in social consciousness when it comes to investing means that many firms and mutual funds now offer ESG investment packages. Investors are able to screen companies in a more holistic way to decide where they want to invest their money to have a positive impact on the world.
Hank Smith, Head of Investment Strategy at The Haverford Trust Company summarises that, “at its core, ESG investing is about influencing positive changes in society by being a better investor.”
Is it really worth it?
ESG investing is experiencing a meteoric rise in popularity as companies and individual investors become increasingly aware of the impact they have on the rest of the world. Global sustainable investment has reached over $30 trillion – 68% higher than 2014 and a tenfold increase since 2004.
“At its core, ESG investing is about influencing positive changes in society by being a better investor.”Hank Smith, Head of Investment Strategy at The Haverford Trust Company
And it’s not just good for the planet – it also creates more value. Studies have found that a strong ESG performance correlates with higher equity returns and a reduction in downside risk. As social, governmental and consumer awareness ESG factors increase, companies and investment firms are beginning to tap into the increased value that an ESG strategy creates.
Let’s break it down
- Environmental. Broadly covers the way that a company impacts the environment around them. It includes everything from the energy used and waste given out, to carbon emissions and impact on local ecosystems.
- Social. This criteria addresses the impact that companies have on the society around them – including their relationship with employees, local communities and labour organisations. It also covers diversity and inclusion and equality initiatives.
- Governance. This relates to the leadership and internal systems within a company. The strategies, controls and procedures that a company puts in place to comply with the law, make effectives decisions and meet the needs of all of its stakeholders are all taken into account.
What are the downsides?
ESG strategy provides a strong framework for investors to put their money behind companies that are having a positive impact on the world.
However, there is rising criticism that the framework enables greenwashing and that the assessment criteria are too vague. Managers of large investment funds who have emphasised a focus on ESG investing have been criticised for holding shares in fossil fuels, weapons manufacturers and mining companies.
Last year, InfluenceMap, a climate think-tank, assessed 593 ESG equity funds and found that a whopping 421 of them were not aligned with the Paris Agreement climate targets. And one of the largest ESG-focused exchange-traded funds, iShares ESG Aware MSCI USA ETF (ESGU), has 3.1% of its $22.9 billion shares invested in the oil and gas industry.
Petra Dismorr, CEO of ESG consultancy NorthPeak Advisory, acknowledges there is more to do: “It is no secret that it [misrepresentation of ESG activities] is on the top of regulators’ agendas to send a strong message and make an example.”
With more time and better regulations, the ESG market still has the potential to ensure the global economy is investing in companies and funds that are contributing to a better world.
How can I get involved in ESG investing?
It’s increasingly easy to get involved in ESG investments. Choosing an ESG rating agency is a good start – here are the best 8 – while many investment firms offer specific ESG focused portfolios for investors to choose from. Robo-advisors can also help to build an investment portfolio that is tailored to your needs.
- Five ways that ESG creates values – McKinsey
- The future of ESG investing – Forbes
- Green investing: the risk of a new mis-selling scandal – Financial Times