Environmental, Social and Governance Investing

Introduction to Environmental, Social and Governance Investing

• One factor that has become increasingly important in recent times is Environmental, Social and Governance (ESG), factors.
• Increasingly investors have come to conclude that doing good is good for business.
• ESG – Effectively measures whether a company is doing good while doing business.
  • E = Environmental – considers issue like carbon footprint, waste, pollution, natural resource usage. Even companies in inherently polluting industries should consider environmental factors.
  • S = Social – considers companies social impact. Issues like use of child labour, LGBTQ+ policies, support of local charities.
  • G = Governance – considers how the company is governed. Suitability of the board, transparency of financial disclosures, conflicts of interest.

ESG and Investment Performance

• ESG increasingly makes financial sense too. Originally perceived as more costly, such as environmentally friendly processes are often more expensive in the short term.
• However, customers and investors are increasingly paying attention to it. Potential to impact sales and brand. Investors are avoiding businesses with poor ESG.
• Regulations are forcing businesses to be more socially aware such as car emissions standards, carbon pricing.
• Risk reduction – better ESG businesses are less likely to be sued, face significant penalties etc.

OVER TO YOU

What are ESG factors, and is there a financial penalty for investing in companies that behave ethically?