Author: Sonal Sahani
Investors are getting serious about investing in socially conscious policies, activities, and relationships. Environmental, social, and governance (ESG) investing provides criteria that allow investors and advisors to select investments that align with their values as well as their financial goals.
What is ESG?
ESG investing is often used synonymously with other investing terms such as sustainable investing (SI), responsible investing (RI), socially responsible investing (SRI), etc. Sustainable investing is the full integration of ESG factors into financial analysis and decision-making (Keefe, 2007). Responsible investing is an approach that aims to incorporate ESG factors into investment decisions to better manage and generate sustainable, long-term results. Socially responsible investing is an investment approach that aims to simultaneously achieve environmental and social goals, as well as financial goals.
Why is ESG important?
ESG will fuel the next wave of innovation. In the traditional sense, the profits a company earns were a direct measure of their success, however with the introduction of ESG, the metrics have shifted from generating profits year on year to the overall impact on the planet and its people. On the contrary, if ESG factors are not addressed by companies, it can pose serious operational, financial, regulatory, and litigation risks.
ESG is seen as the right choice to make ethically, but it can also present multiple opportunities that can be leveraged for longer-term results. The coronavirus pandemic, in particular, has reinforced the discussions about the interlinked nature of sustainability and investments. Here are a few trends that have led to a rise in ESG investing.
- Strong governance is extremely important
The sub-prime crisis of 2008 was a wake-up call for the public and private sectors. It demonstrates how issues of culture and conduct could have systemic importance. Strengthening and enhancing corporate governance is increasingly a goal for regulators and fixed income and equity investors through agile ownership.
2. Climate change is for real
Climate change is now globally understood and (almost) universally acknowledged. Alleviation techniques include international agreements such as the COP21 Paris agreement, which aims to keep the rise in world temperatures below two degrees, and private initiatives such as sustainable investment portfolios and more disclosure of climate-related financial risks.
3. Demographics are changing
According to the U.S. Census Bureau, millennials, or people who are born between 1981 to 1996, are expected to surpass the Baby Boomers in 2019. We are seeing significant wealth transfers to millennials and women. Millennials and Generation-X are increasingly taking over from Baby Boomers in positions of influence, changing business, financial and political landscapes. The newly formed French government is an example — half of its members are women. Younger generations are driving the fast growth of the “green bond” market and the field of sustainable finance in general.
4. Social media is driving convergence in social norms
Given its limitless nature, social media has the capability to alter the ethical design of countries, and for investors, its effects vary from changes in individual consumer preferences and traditional election patterns to subsequent demands for new regulations.
For investors who prefer a managed portfolios approach, Tenjin Ai offers ESG conscious portfolios that could be a great place to start.
Tenjin Ai is a next-gen Robo advisory platform that is based in New York. It currently offers investment strategies that also include ESG investing.
Click here to explore Tenjin Ai’s ESG Strategies
Besides, fees with Tenjin Ai would be lesser than a DIY approach. The upside to this is, you will benefit from better than average returns and expert-level portfolio management.
Thus, today, when investors start investing in stock markets, they’re likely to choose companies/ strategies that embody conscious ESF principles.
