ESG: The Future of Investing
As society moves towards more sustainable measures and public consciousness increases, ESG components will become more prevalent and a determinant in investing. Pivotal investment companies, such as Morgan Stanley, are already prioritizing ESG in their strategies and integrating monetized measurements to provide a competitive advantage. Currently, ESG proceedings are primarily symbolic over substantive. Many ESG topics will not have prompt impact but over time, companies can reap the benefits from the longevity of their ESG investments (Insights, 2020). However, as research and technology prevail and society looks forward, tangible initiatives will transpire and ESG investing will promise a future edge for progressive investors.
About ESG Investing
ESG stands for Environmental, Social, and Corporate Governance. It is most commonly referred to as sustainable investing, ethical investing, or impact investing. The acronym signifies “what ESG investors look for when seeking stocks to analyze” (Rotonti, 2020). Despite gaining recent attention, ESG is no novice to the investment world. ESG practices and ideology date back to the 1800s “when religious groups, such as Quakers and Methodists, established socially responsible investing guidelines for their followers” (Hermes Investment Management, 2018). Since then, ESG has transformed into a much more concrete and meaningful practice.
The recent attraction ESG has gained from “big name” investors is not an overnight sensation. In the 1960s, investors deviated from traditional financial analysis when the tobacco industry and the South African apartheid regime were relevant (What is ESG, n.d.). As investors ventured outside of these industries, their portfolios represented more ethically conscious considerations. In 2006, the United Nations “encourag[ed] the incorporation of ESG matters into investment practice” (Hermes Investment Management, 2018). They satisfied this through the UN Principles for Responsible Investment (UNPRI), a set of six investment principles (Hermes Investment Management, 2018). Through the set of principles, signatories vow to seek, incorporate, and promote ESG components within investing. The goal of these principles is to develop “ a more sustainable global financial system” (What are the Principles, 2017). Today, an array of problems have accrued prolifically, consisting of droughts to aging populations (among others), and it is an investor’s job to account for that. Studies have revealed that as the younger generation succeeds, they will be demanding more from their investments. As baby boomers surrender their wealth, $30 trillion to be exact, millennials, who are two times more likely to obligate their investments to resolve environmental and social problems, will take charge of the investment world (What is ESG, n.d.).
Investors can go about ESG in a variety of ways. The most common ESG practice is generating portfolios that follow their ESG values. Other investors capitalize on the benefits of both traditional and ESG investing through ESG integration. This involves “combining the ESG lens with more traditional stock analysis techniques” (Rotonti, 2020). At large establishments, like Goldman Sachs, they have pledged to equip their customers with the advantages from both ESG investing as well as the rigor and risk-return of traditional investment management (ESG and Impact Investing, n.d.).
Although ESG looks promising to many investors, there are those who are skeptical of it being a successful investment strategy. Their differentiation is based on the idea that ESG investing will not deliver an investor’s demands in a relevant timeframe. For an individual investor who is planning on retiring within the next 10-20 years, ESG will not provide them with their best possible returns (Armstrong, 2020). Looking at ESG through an individual’s lens, focused entirely on gains, ESG may not be the most attractive option initially but it is feasible for their gains to match or even exceed traditional investing in the long-term. On the subject of large investment banks, ESG is the future and what they put into it now will benefit them for their longevity. There are no returns available if the world is left uninhabitable. In addition, investment success ultimately comes down to two factors that are beyond the reach of both traditional and ESG investing.
The two factors are growth and value, both of which can be attributed to each type of investment strategy (Armstrong, 2020). Growth occurs when cash flows are greater than anticipated and value occurs when stock is purchased at a lower price than its worth. ESG investing has achieved both of these factors in recent years. For example, “Vanguard’s US ESG exchange-traded fund return of 28 percent has whipped its broad-market ETF’s 17 percent” (Armstrong, 2020). Some of the most successful companies in the fund, such as Tesla, were tech companies. Now if these companies failed, the ESG fund would not have been as successful but this same scenario gamble can apply to any other investment strategy and ESG happens to be the gamble necessary for a better future.
The steps that are being taken now through ESG investing will allow future generations to reap benefits for years to come. When an individual or company invests, it is not for now but for later. As environmental, social, and governance problems arise globally, it is an investor’s job to take into account the effects that the problems will have. Though they may not be visible now, the consequences will materialize eventually, and having impactful companies on the front lines will promise the most success.
Works Cited
Armstrong, R. (2020, October 23). The fallacy of ESG investing. Retrieved November
24, 2020, from
https://www.ft.com/content/9e3e1d8b-bf9f-4d8c-baee-0b25c311 3319
ESG and Impact Investing. (n.d.). Retrieved November 24, 2020, from
https://www.gsam.com/content/gsam/us/en/institutions/strategies/explore-by-solution/esg-and-impact-investing.html
Hermes Investment Management. (2018, May 11). Evolution of ESG. Retrieved
November 24, 2020, from
https://citywire.co.uk/wealth-manage r/news/evolution-of-esg /a1116486
Insights - Sustainable ESG Investing: Turning Promise into Performance. (2020, July 07). Retrieved January 21, 2021, from https://www.goldmansachs.com/insights/pages/sustainable-esg-investing.html
Rotonti, J. (2020, October 05). Your Guide to ESG Investing: Socially Responsible
Stocks. Retrieved November 24, 2020, from
https://www.fool.com/ investing/ stock-market /types-of-stocks/esg-investing/
What are the Principles for Responsible Investment? (2017, December 01). Retrieved January 21, 2021, from https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment
What is ESG. (n.d.). Retrieved November 24, 2020, from https://www.msci.com/what-is-esg
