One of the fastest growing trends to have emerged in the trading and investment space over the last number of years is so-called ESG investing.
Despite getting almost constant media coverage in the investment world over the last number of months and years, however, for many trading hobbyists there is still a surprising amount of uncertainty about what exactly ESG is and why you might want to include ESG considerations in your portfolio.
With this in mind, in this short article, we will briefly set out what ESG investing is and why an increasing number of traders have been building ESG considerations into their strategies. So, if you want to ensure your online investment portfolio keeps up with the latest trends, keep reading!
What is ESG?
Also known as environmental, social and governance investing, ESG is a general term used to describe the practice of choosing an investment strategy that conforms with certain values and beliefs regarding environmental protection and social change.
Given how widely the term is used these days, ESG can be taken to encompass a number of different things. In general, it captures investment strategies where specific ethical, social and corporate governance concerns are considered when making decisions.
Although it has in the past been dismissed as irrelevant, too lofty or impractical, ESG has come to the fore in a wide range of different sectors and it is now very much moving to the center of the global investment space.
Indeed, as of December 2021, one prominent industry report claimed that the assets under management at global exchange traded funds marked as “sustainable”, or which had environmental, social or governance objectives at their core, amounted to over $2.7tn. And in the fourth quarter of 2021 alone, this saw a total of $143bn in new capital flowing into these funds.
In addition to constituting serious capital inflows into the global trading space, ESG is also having a wide impact across all sectors and industries. As evidence of this, as of 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies and 67% of privately owned companies all had publicly stated ESG objectives in place.
With that said, although many are skeptical of what ESG actually stands for and whether it might be able to deliver on these goals, it is clearly having a tangible impact on global movements of capital.
From the perspective of the individual trader looking to grow their personal investment portfolio, however, is ESG worth thinking about?
Should you consider ESG?
Clearly, ESG is having an impact on the global trading and investment space. But will it actually do your portfolio any good, and more importantly, what are the costs of going green?
In terms of the business case concerning ESG, the statistics are quite clear. As much of 80% of the world’s largest companies are reporting exposure to either the climatological or market risks associated with climate change. This comes in addition to the $1.3tn that climate-related weather events are expected to cost businesses by 2026.
ESG considerations are also increasingly important to consumers – as many as 76% of consumers claim they will stop buying from companies if they are found not to meet basic ESG goals. Furthermore, some reports have even noted that consumers tend to be more loyal to companies that support social or environmental issues.
With these figures in mind, it is clear that meeting basic environmental goals can have a big impact on the operating revenues and profits of companies. And if you are trying to identify companies that will be able to withstand the societal shifts that climate change is bringing about, ESG considerations could help you to identify these companies.
Given that as many of nine out of 10 publicly traded companies have adopted ESG as part of their business ethos and objectives, it is clear that ESG is here to stay. ESG offers tangible benefits to companies by allowing them to better manage the business risks associated with climate change and other social or political issues.
As more and more companies start to adopt ESG as part of their corporate strategies, however, would-be investors will need to pay close attention to how substantive these statements are. This is to avoid investing in companies that simply adopt the slogans associated with ESG without doing any of the work necessary to implement them.