ESG stands for the Environmental, Social, and Governance factors within a business. It's a set of standards that investors use to screen potential investments. Examples include whether a company manages its carbon footprint, how well it treats employees, and if it has governance policies in place for addressing issues like diversity and inclusion.
Directing capital towards investments where such factors are evaluated and taken into account is known as "ESG investing" or "sustainable investing."
Because businesses cannot ignore material risks that threaten the stability or profitability of its operations. Investments are at higher risk when they ignore ESG-related risks – particularly as the consequences of global concerns like climate change, inequality and racial injustice become more closely tied than ever to the bottom line.
ESG measurement is an early indicator of such risks.
In addition, investors, consumers and other stakeholders are increasingly interested in ESG measurement. According to a survey conducted by the CFA, 73% of investors take ESG factors into account for investment analysis and decision making. PwC’s 2021 Consumer Intelligence Series survey indicates that 83% of consumers now believe companies should be actively shaping ESG best practices.
Yes! Though ESG measurement first started in the public sector, a 2018 RBC survey of Private Equity investors shows LPs are pushing for ESG investments in portfolios because they are convinced ESG investing pays off via increasing returns, creating alpha, and decreasing risks.
ESG is no longer a simple “box-checking” exercise but rather an integrated part of the investment process.
There are currently 4,000 signatories and counting for the Principles for Responsible Investment (PRI), a United Nations-supported international network of investors and a leading proponent for sustainable investment.
Companies that prioritize sustainability factors perform better financially. The market reflects this global shift in the investment landscape:
There is a continued emphasis on sustainability and impact as the younger generation enters the workforce:
Young employees want to work for socially conscious employers. Companies that incorporate ESG factors in their values attract and retain more talent and boost worker productivity. The evidence suggests that these gains are worth up to 2% of a company’s annual stock price.
Many companies are proactively reporting on ESG as a result of these factors.
ESG investing was on a steady rise prior to the COVID-19 pandemic, in both public and private sectors. A 2020 Bain report states that since 2015, impact fund assets have swelled by 154%, up to $28 billion.
ESG investing hasn't slowed despite the pandemic.
Investors also have preferred sustainable assets during the downturn. In the first quarter of 2020 alone, global sustainable open-ended funds brought in $40.5 billion in new assets, a 41% increase year-over-year.
If anything, the pandemic has only further highlighted the need for robust ESG measurement and evaluation when making investment decisions.
Since the long-term gains are proven, it seems unlikely that this is merely a trend. More and more investors recognize that ESG metrics are not vanity metrics. The benefits stretch far beyond simply good PR marketing and brand image.
ESG outperformance boils down to factors such as employee job satisfaction, the strength of customer relations, or the effectiveness of the company’s board, which lead to overall resilience and stability for the business.
ESG considerations pave the way for long-term sustainability. They’re also key to factoring in risks not normally priced into value through traditional analyses.
There is growing evidence that not only does ESG investing produce returns, those returns actually outperform standard investments.