Environmental. Social. Governance.

Do you want to make the world a better place?

Well, invest in companies that are doing just that.

What is ESG Investing?

The investment arena has always been a place where new trends come, get established and in some instances change our world for the better. We have witnessed a remarkable push towards investing in more sustainable, socially responsible and environment-friendly companies. It’s no wonder ESG investing is gaining traction. Research is increasingly showing that this investing method can reduce portfolio risk, generate competitive investment returns, and help investors feel good about the stocks they own. The ESG investment sector allows investors who are thinking about the future and the world that they want their children and grandchildren to live in, to actually make meaningful steps towards making a difference. There are a lot of people who care about the environment, nature, sustainability and are willing to do their part in helping the world. However, even though that the socially responsible investment theory has been around since the 1960s and 1970s, it seems that it never managed to get any meaningful and mainstream traction until now. Thanks to the remarkable growth of the ESG space, people that want to make a change could actually make a meaningful impact on some of these important socially responsible topics. As an ESG investor you are doing just that by investing your capital in large international corporations that are spending billions annually in following these environmentally friendly and socially responsible trends. In that way, you are indeed contributing to the positive change that you would like to see in the world.

How does a company join the ESG space?

In order for a company to qualify as an ESG investment though it needs to be active in all 3 ESG components, thus showing that it is committed to make the world a better place.

The environmental component requires research into a variety of elements that illustrate a company’s impact on the Earth, in both positive and negative ways. A company that’s an actively good steward for the environment might be deserving of your dollars. For those details, locate sustainability reports prepared using respected sustainability standards such as Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI). Corporate websites with sustainability pages can be useful for budding ESG investors, but be wary when they don’t contain enough detail to paint a complete picture.

The social component within the ESG space consists of people-related elements like company culture and issues that impact employees, customers, consumers, and suppliers — both within the company and in greater society. A great way for ESG-minded investors to keep track of which are the most active companies in the ESG space is to keep up with respected lists and annual rankings, including Fortune’s Best Companies to Work For and Forbes’ Just 100. Pay attention to media reports related to how companies treat their employees and their lobbying efforts for or against social justice issues

The ESG investment mindset focuses also on the corporate governance component, which relates to the board of directors and company oversight, as well as it analyzes whether the company has a shareholder-friendly or a management-centric attitude. In less dry terms, ESG investors analyze how corporate managements and boards relate to different stakeholders, how the business is run, and whether the corporate incentives align with the business’s success.

A great sign for the right corporate governance within a publicly traded company is the % ownership among the senior management of the company. Strong management teams and boards have a significant amount of “skin in the game,” meaning they own shares of the stock they’re steering and have a personal incentive to make the company perform well.

How did ESG Investing come to existence as an investment theory?

For more than 50 years, many management teams and investors have strongly supported the shareholder value theory, which was popularized in 1970 by Milton Friedman (and is also known as the Friedman Doctrine). Friedman argued that companies’ only social responsibility is to maximize shareholder value, in effect to make money for the folks holding the stock. However, with the way the market has evolved and changed throughout the last couple decades as well as the degree to which people are now much more knowledgeable and conscious about things like, environmental sustainability, socially responsible corporate behavior, ethical and moral business tactics, renewable energy etc. it seems that there has been a major shift towards a different investment model and theory. Going through few serious market downturns, some of which ended up growing into worldwide recessions throughout the years, investors as well as regular individuals now know that the “always chasing profit mentality” is not really a recommended option for building a long-lasting and sustainable economic growth. If you are only concerned with making as much money as possible as a business, so that you could continue to increase your investors and shareholders’ returns, and you do that at the expense of having a socially responsible and environment-friendly business model, then you will inevitably find out that your growth potential is quite limited. Reason being, is that in order for your business to get to the next level and have continued success in the long run, you should build a solid, respected and trustworthy identity of your brand as a company. Companies that chase the approval of the markets instead of building relationships with employees can end up making workers more likely to unionize or quit. And when this toxic philosophy pervades a company’s culture, it’s more likely that employees will make the poor decision to engage in dangerous, risky, or even illegal dealings to appease management’s demands for short-term profit. Ultimately, obsessing over EPS and other short-term metrics is a good way for companies to open themselves up to lawsuits, investigations, and regulations.

ESG Investment Strategies

There are 4 main ESG Investment Strategies that every investor should be aware of. We will highlight the main definitions and differences between them, so that you have a better idea as to what type of an ESG investor are you.

1. Socially Responsible Investing (SRI) – It generally uses exclusionary screens, or filters, that investors can use to exclude certain companies and industries that don’t meet their particular value criteria. The SRI investor sets their screen to make an investment decision by tailoring it to their own values. For example, many SRI investors screen out tobacco, alcohol, and weapons stocks, leaving most other companies and industries eligible to select for further analysis.

2. Shareholder activism. Another form of SRI, shareholder activism occurs when investors buy shares of companies that other SRI investors find unpalatable or reprehensible, with the expressed purpose of engaging with those companies to encourage, or demand, improvement. Engagement tactics include filing shareholder proposals, attending annual meetings, and speaking directly with executives.

3. Impact investing – It represents another philosophy under the SRI umbrella. Impact investors put their money in companies that have demonstrably positive environmental and social impacts, on top of positive financial returns. Impact investors have differing expectations when it comes to financial returns. While some target below-market-rate returns, others expect results that are comparable or even beat the market, according to the Global Impact Investing Network.

4. Conscious capitalism. “Conscious capitalism” is another buzzword you’ve probably heard. It’s a business management strategy that emphasizes aligning the business with stakeholders for shared success. A company that fits within that realm not only seeks profits to benefit shareholders, but also serves other stakeholders like employees, the environment, suppliers, customers, and communities. Serving all stakeholders is thought to strengthen a business and generate long-term profitability

ESG looks a lot like SRI in that it focuses on investing in publicly traded companies within certain markets and industries that they find favorable. However, ESG investors actively opt in to companies because of impressive environmental, social, and governance attributes they’ve demonstrated. Conversely, a traditional SRI investor focuses on excluding certain industries or companies because they have failed in certain aspects. ESG can be confusing for folks who are more familiar with the straightforward SRI approach. However, just remember that with SRI, your beliefs demand you outright exclude whatever sectors you loathe, whether that’s tobacco, alcohol, weapons, gambling, or other sin stocks. ESG on the other hand offers more flexibility and depth of research into the nuts, bolts, and fine details that make up a comprehensive corporate initiative and define management’s patterns.

A distasteful industry can yield a high-ESG company. For example, a defense company that specializes in missile production and scores high on environmental sustainability, employee treatment, corporate governance, and diversity may merit inclusion in an ESG fund, even though it would be a “no-fly zone” stock for a traditional SRI investor.

Conclusion

ESG Investing is an alternative and fast growing theory in the market that aims to resolve some of the major social, environmental and health issues out there by attracting investment capital into companies that are focused not only on generating higher revenues, but on leaving a positive footprint in the world. It is important to note that ethical investing has come a long way since SRI was a small niche in the investing universe. SRI, ESG, and impact investing used to not even exist, and now they’re catching on with both financial institutions and everyday investors, all of whom are seeking to do good with their investing dollars while doing well for themselves.

According to US SIF’s 2018 Report on Sustainable, Responsible, and Impact Investing Trends, total SRI assets jumped 38% to $12 trillion since 2016 in the U.S. alone. These assets represent 26% of the total U.S. assets under management ($1 in $4). For perspective, when US SIF first measured the size of the market in 1995, it was $639 billion; the area has increased 18-fold, and has since enjoyed a compound annual growth rate of 13.6%.

It is true that there is a lot of growth potential in the ESG space, but as with every other investment theory and market segmentation, every investor should perform a very detailed research and analysis for himself in order to find out which are the right companies for him to allocate his capital to in accordance of his own targeted returns, risk tolerance, holding time frame etc.

ESG Companies to look out for:

  1. NextEra Energy (NEE)
  2. NVIDIA (NVDA)
  3. Salesforce (CRM)
  4. Microsoft (MSFT)
  5. Brookfield Renewable Partners (BEP)
  6. Home Depot (HD)
  7. Tesla (TSLA)
  8. Beyond Meat (BYND)
  9. PepsiCo (PEP)
  10. Edwards Lifesciences (EW)

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