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Environmental, Social and Governance Investing

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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?

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