There has been a misconception that financial investments and social returns don’t always go hand in hand. In the past, investors tended to believe investing with a focus on social impact could cost them instead of bringing returns. However, the obvious growth in demands for ESG from sustainability-conscious investors are clearly changing this, as people are becoming more aware of how the environmental and social implications of their investment decisions could impact their own surroundings.

What is ESG and its link to Sustainable Investing?

ESG investing falls under the umbrella term of sustainable investing, and it is often associated with socially responsible investing, value-based investing, and impact investing, among others. Investing with a mission used to be more synonymous with green or eco-investing, however, the emergence of ESG has managed to encapsulate a more holistic approach to sustainable investing.

Environment

The environmental element of ESG is broad and its evaluation can include anything from a company’s carbon footprint to its contribution in renewable energy. In this sense, investors and portfolio managers can evaluate for qualified companies through both negative and positive screenings.

Social

A company’s social evaluation may include the company’s social impact on its environment and local community. The social element of ESG encapsulates companies’ relationships with their workforce, which includes employee’s pay, health, safety, as well as workplace diversity and equality.

Governance

The internal system and leadership profile of a company play a pivotal role in how the company operates and makes an impact to its local community. The corporate governance factor in ESG ensures industry best practices are in place and being executed. Whatever cause an investor aims to support, evaluating corporate governance should never be overlooked.   When it comes to your investment, what are the benefits of ESG investing? Is it a long-term value creation that will reward you down the road?

#1 ESG has practical purposes beyond ethical concerns

Can ESG investments perform better? With ethics being a primary concern, sustainability has not been considered synonymous with desirable financial performance. However, this has proven to be untrue. Companies with strong ESG practices have greater strategic freedom, as they reduce the risk of negative reputation and other consequences of disregarding sustainability elements of both environmental and societal aspects. For investors, putting their money into sustainable companies could save them from the exposure to adverse risks.

#2 ESG is a way to mitigate risks in the long-term

ESG can help companies shift from a reactive approach to proactive risk mitigation. This enhances the process of developing risk mitigation plans and strategy roadmaps which will in turn help investors and fund managers evaluate choices better moving forward. Contrary to common perception, strong performance and sustainability often go hand in hand^[1]. In the long-term outlook, firms with high sustainability value deliver higher performance compared to those with lower sustainability value. For investors, observing ESG trends tremendously helps identify companies with strategic advantages in managing costs, and those that are not simply complying but also being proactive in their sustainability approaches.

#3 ESG highlights companies whose values align with yours

Aligning where you put your money in with a cause you aim to support may not be as straightforward as it sounds, but ESG breaks this down in a more tangible format. Some investors care more about one element of ESG than another. For instance, within the ESG scope, some investors might prefer to concentrate their money on the social spectrum of ESG. Hence they could evaluate the companies based on certain factors, such as looking at how a company treats its employees, workplace diversity, pay fairness, and how a company manages its relationship with its workforce. Likewise, if investors are primarily concerned with a company’s environmental impact, they might not only look for companies that comply with regulations, but rather evaluate what proactive steps the companies have taken, such as: What lengths did they commit to in order to minimise their carbon footprints? What is their stance on climate change? What contributions have they made in minimising greenhouse gas emissions?

#4 ESG keeps growing in demand

As highlighted in this report, while the pandemic toppled the markets, instead of declining, sustainability-focused funds have attracted a record amount of capital in the first quarter of 2020. Environmental sustainability will continue to grow in the wake of the pandemic. One element highlighted in the report is the social element of ESG that will shift to the forefront, as society seeks stability and requires as much support as it can garner in order to recover.

#5 ESG is the future

The investing habits of Millennials spurred the growth of sustainable investing as they continuously seek to invest in companies that align with their values. More than 90% of millennials expressed their desire to switch to brands driven by a cause, while 70% expressed a willingness to spend more on ethical products^[2]. It does not stop on millennials. The Gen-Z believes that racial issues are the most important cause to address, establishing racial equality as an increasingly valuable aspect to evaluate in measuring ESG. As the new generations put a greater emphasis on sustainability, it is not too far in the future that ESG could cease to be an option, but simply the norm.

Need further guidance? We can help

We have further resources in sustainable investing you can easily access through our ESG Whitepaper. We believe that responsible financial growth not only brings benefits, but is also integral in delivering long-term value for investors, and is beneficial to both the environment and society. With our long history of creating and managing sustainable investments opportunities for our clients, we are equipped to help you achieve your financial goals that align with your values. If you need a personalised solution, feel free to get in touch with us.

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