Investing in good corporates is intuitively appealing. ESG Investing is buying sustainable businesses that are leaders in their industry when it comes to caring about their people, the planet, and their company’s purpose and mission reflect that distinctly.
ESG encourages a broader view as it encourages companies to look beyond their traditional remit. ESG scores measure sustainability. Companies are evaluated on non-financial criteria. ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance. This might include how corporations respond to climate change, how good they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.
ESG investing is based on the assumption that ESG factors have financial relevance. For the average investor, spotting ESG risk can be challenging. ESG factors may not be evident in financial statements. Some of this information may be found in annual reports or separate corporate social responsibility reports corporations produce. More companies are also providing voluntary disclosure through organizations such as the Global Reporting Initiative or the Carbon Disclosure Project. Investors need to familiarize themselves with the potential risks within a company and stay on top of the news about their investments.
High E score – can indicate that a company is less exposed to significant risk due to environmental issues.
High S score – can reflect a better ability to attract and retain skilled workers, to maintain consumer loyalty and avoid product liability issues.
High G score – indicates a well-run company with strong governance and high-level risk controls.
Fundamental investors typically agree that a strong corporate culture is a pre-requisite for a sustainable “value creation” and that this may fall across an “S” or “G” dimension. There is strong research evidence of ESG investing delivering good returns since companies with strong sustainability scores demonstrate better operational performance and are less risky. Claims that you have to surrender returns to engage in sustainable and impact investing are flawed. Far from harming returns, compelling evidence suggests it often boosts the risk-adjusted rate of return.
ESG criteria have broadened the way participants in the ecosystem think and behave. For e.g.: On the social side, companies with strong relationships with stakeholders including employees, suppliers, communities and investors; benefit from a strong reputation and potentially more business. Since a rising share of a company’s valuation is tied to intangible assets such as brand reputation, environmental and social performance is more material than ever.
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