Did you see the Google Doodle on Earth Day last week? It was the simplest wake-up call we’ve seen in some time. The gif showed the physical changes on Earth. What is truly scary is the timeline – in just two decades, the Earth has become worse.
In case you missed it –
Are you wondering what connection Google Doodle has to Investing?
We want you to know more about investing in sustainable businesses. That gif indicates the rapid changes Earth has undergone due to rampant deforestation, increase in global temperatures, shrinking waterways, and more. It is the cost we may pay for economic growth and welfare.
But don’t you want to invest responsibly? Well, that’s what the blog is about sustainable profit through ESG investing.
What is ESG investing?
ESG stands for Environmental, Social, and (Corporate) Governance – the three pillars to evaluate a company’s sustainable performance.
ESG investing is also known as socially responsible investing, impact investing, or sustainable investing. As the name suggests, investing in assets with a focus on environmental, social, and governance-related factors. As an investor, you look at the financial performance of the company. However, ESG factors have more importance and higher weightage. Such a style of identifying potential businesses, which weigh better on the ESG parameters is known as the ESG Investing methodology.
Common themes or problems ESG Investing addresses
- Environmental themes
- Climate change
- Greenhouse gas emissions
- Carbon footprint
- Water usage and conservation
- Social themes
- Employee engagement and treatment
- Employee development
- Supply chain sourcing
- Diversity and inclusion policies
- Governance themes
- Potential conflicts for board members
- Executive compensation
- Shareholder lawsuits
- Diversity of the management team and board members
Why Is ESG Investing Gaining Popularity?
Younger generation demands an ESG stance
The millennials are highly active and vocal about environmental issues and climate changes. They want to see if the companies they invest in are ethical and support global causes. For example –The save the Planet campaign raised the issue of single-use plastic overuse. Many companies associated with using plastic or disposing of plastic as part of their manufacturing process or as part of their product offering took a beating in the stock market. These companies had to use alternative products to plastic to be relevant in the eyes of the investor (e.g., Moving from plastic bags to paper bags at supermarkets) or face the heat from all the stakeholders of the company.
After being thoughtful about world problems and investing in a sustainable environment, there is another aspect you must consider -ESG stocks performing better. The historical performance suggests that ESG themes have performed much better than the non-ESG-based portfolios. These ESG portfolios also do well during global events like the Covid-19 pandemic.
ESG Trends Are For Long-Term
Many investing themes stay for 5-10-15 years, and then they fade away. ESG trends, on the other hand, are here to stay for an exceptionally long time and maybe a few decades. The most-noticeable long-term themes can move away from fossil fuels to renewable energy sources. If you believe in such trends and decide to be on board this journey, you may benefit as it develops and these companies grow. You may be able to future-proof your portfolio through ESG investments.
Factors To Consider While Selecting ESG Stocks
Most ESG funds use a rigorous review process to pick the stocks. They look at quantitative ESG metrics that match the ideology and vision of the funds. Moreover, they consider parameters such as greenhouse gas and carbon emissions too. So, companies with higher carbon footprints like coal miners, tobacco manufacturers, and oil and gas companies lose points and do not feature as ESG-relevant companies.
Companies in the renewable energy industry, FMCG, technology, and healthcare typically feature in the ESG portfolios.
The ESG rating or score – a must for investors to evaluate.
An ESG rating is a way to measure a company’s level of sustainability. External agencies calculate the score based on several factors such as environmental impact, employee engagement and working conditions, and best practices. An ESG score can range from 0 to 100.
Risks Of ESG Investing
Lack of universal global ESG standards
ESG investing is a new concept so, it does not have a recognized global standard. There are global benchmarks for the investors to check, analyze, compare and take decisions. There are no agreed-upon standards to evaluate the performance of ESG application and implementation for any company. Such inconsistencies create confusion when comparing two different ESG funds as the application of funds may be drastically different from theirs. One of the ESG funds holds tobacco stocks as the definition for that fund, which meets the criteria.
Lack of enough historical data
There is hardly any data available for investors to analyze. Long-term data does not suggest ESG funds as a financially viable option. Such untrue inferences may drive the investors away from these funds.
No mandated ESG reporting governance
Today, SEBI has not mandated a reporting structure for listed companies about their efforts on ESG initiatives. The ESG companies voluntarily issue regular reports and commentary, which may be inconsistent with any other company – hence, not comparable. ESG reporting is not a priority for the board members of all the companies yet.
If you are planning to invest in the future, make sure you invest in themes that are here to stay in the future. Identifying ESG themes and following a structured approach may be a profitable investment strategy for your long-term portfolio.
While you pick the right ESG stocks to invest in, check our long-term 5 in 5 Wealth Creation Strategy to start creating wealth.