What is ESG?
The abbreviation ESG, which is so popular today in the investment world, stands for Environmental, Social, and Governance. In response to the global environmental deterioration and to support the efforts to improve the working conditions of employees, the investment community started paying more and more attention to the principles of responsible investing. Investors are used to evaluating companies in terms of their fundamental indicators. However, in today’s world, when picking the next company to invest in, the following factors become increasingly more important: good corporate stewardship, the enterprise’s carbon footprint, how much the business cares about its employees, as well as its transparency, absence of corruption, and good disposition towards its shareholders. The ESG rating is used to evaluate these characteristics.
How important is the ESG rating?
The investment world is on the cusp of generational change. The current generation of millennials inherits substantial capital from the baby boomers generation, and that capital is going to be redistributed based on the preferences of modern investors. A striking example is PKA, a Danish pension fund that sold all of its shares in 35 companies in the oil and gas sector as well as in 70 coal companies, explaining this with its commitment to the Paris Climate Agreement. Subsequently, many funds around the world followed their example.
GSIA polls showed that 85% of millennials who are market participants recognized the principles of responsible investment as extremely important, and 61% of respondents have already purchased assets based on the ESG rating. There are already more than 2,500 different ETFs in the world that invest according to ESG principles.
What are the criteria of the ESG rating?
Evaluates the company’s environmental stewardship, its preservation of natural resources, reduction of its carbon footprint, and also its commitment to green initiatives and developments to improve its environmental friendliness.
Evaluates the company’s working conditions, workplace safety, gender diversity, investment in social projects and education.
Evaluates the company’s transparency and information disclosure, its management level, the degree of management corruption, and its attitude towards shareholders.
What are the forecasts for the growing importance of ethical investing in the future?
Investments that can be considered responsible are growing exponentially. According to Deutsche Bank, their total volume is about $30 trillion, while analysts expect it to reach $100 trillion by 2030. In particular, President Biden’s infrastructure plan includes investing hundreds of billions of dollars in green technologies. The world is committed to achieving zero industrial carbon dioxide emissions by 2050. Government programs in most of the G7 countries place significant emphasis on the need to increase their expenditures on preserving the environment.
In conclusion, we would like to note that according to many analysts the significance of the ESG rating will only increase. Companies that act with social responsibility, respect their employees, and comply with environmental standards will make more money because their businesses are going to gain more attention from investors and buyers. And thanks to the greater than expected growth, their shareholders will also receive additional profit.