ESG Investing: why it matters
ESG Investing: why it matters

Many investors, particularly younger ones, are putting their money where their values are, prompting some of the world’s largest institutional investors to demand more from businesses. Indeed, since 2006, the United Nations Environmental Program – Finance Initiative (UNEP-FI) assessed the intersections between the finance industry and human rights in order to develop a sustainable approach. The immediate consequence for companies is to adjust and serve a “social purpose” that benefits all stakeholders.

The criteria used to evaluate whether firms satisfy this social purpose are generally grouped into environmental, social, and governance (“ESG”) standards. Individual investors, investment institutions, and rating agencies track performance according to these standards to decide whether to invest in a particular company. By 2018, nearly $12 trillion of investments had been selected according to these criteria, an increase of $8.1 trillion from 2016.

There are many investors who also believe ESG investments provide better risk-adjusted returns than typical investment strategies. This is because firms that focus solely short-term profit are at risk of sudden market or firm-level shocks. Employee strikes, environmental disasters, and supply-chain mishaps are largely preventable crises that ultimately harm stock price, consumer perception, and sales. Following the Deepwater Horizon Oil Spill, for instance, BP’s stock price fell to its lowest level since 1996. Today, BP’s stock trades for less than 50% of its price the morning the spill occurred in 2010.

The economic consequences of socially harmful business decisions may become more amplified for public corporations soon than you think. SEC Chair Gary Gensler recently announced the regulatory agency’s new agenda, which includes an expansion of ESG-related disclosures. Although no new formal regulations have been promulgated yet, Gensler’s announcement demonstrates the government support of ESG investing.

As individuals, institutional investors, and government entities begin formalizing policies on ESG criteria will only become more influential. It may be a good time for large and small companies alike to consider how well they conform to investor values.

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