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Understanding ESG Investment

Understanding ESG Investment

May 19, 2022
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In recent years, ESG (environmental, social, and governance) investing has been gaining popularity and attracting a growing number of investors wishing to make safer and more profitable investments. But what is an ESG investment? And why should you consider ESG investing?

ESG Investment

ESG investing or socially responsible investing means that environmental, social, and governance (ESG) factors are integrated into investment decisions. ESG factors cover a wide range of topics that are usually not part of financial analysis, but which may nonetheless be of financial relevance.

In other words, the purpose of this strategy is to evaluate not only the classic financial criteria (yield, etc.) but also the behavior and actions of an economic actor before embarking on an investment.

As mentioned, ESG investing takes into account 3 criteria, namely:

  • The environment
  • The social
  • The governance

A quick look at each of the three;

The environment

The analysis of the environmental criterion within the framework of an ESG investment consists of evaluating the strategy implemented by an economic actor to:

  • Improving waste management
  • Reducing polluting gas emissions
  • Reducing energy consumption
  • Prevention of disasters such as soil contamination or oil spills
  • Among others

The Social 

The analysis of the social criterion, for its part, focuses on:

  • Respect for employee rights
  • Management policy
  • The policy of parity and hiring of PRMs (people with reduced mobility)
  • Training policy
  • Prevention of work accidents
  • Among others

The Governance 

Regarding the governance criterion, its analysis covers, among other things:

  • Transparency of executive compensation
  • The fight against corruption
  • The company's relationship with its various shareholders
  • The direction
  • Board of directors
  • Among others

ESG investing in Numbers 

According to the Global Sustainable Investment Alliance1, ESG investing grew to over $30 trillion in 2018. This number is expected to rise as more consumers become environmentally conscious and investors demand social responsibility and transparency.

When ESG was first introduced, many businesses thought it will come at the expense of returns, but as it turns out, that’s not the case. The Bank of America estimates that ESG will grow to $50 trillion in the next two decades. In fact, over 2,250 money managers who oversee an estimated $80 trillion in assets signed the UN-backed principle of Responsible Investment.

ESG is set to dominate the agendas for most investors in the coming years. A report by The Bank of America indicates that 70% of US assets cannot be analysed without using ESG.

“Intangible assets— assets tied to reputation, brand, and intellectual property – have reached record highs for the S&P 500 companies. Analysing financial metrics alone simply won’t suffice anymore”2

Why invest in ESG-labelled companies?

Some investors use “ESG” criteria to determine which stocks match their beliefs and values. Such investors may, for instance, choose to invest in companies that have a proven record of environmental sustainability.

The ESG logic partly alludes to the fact that companies that perform well in terms of environmental, social, and governance have a positive impact on their economic performance.

Generally, ESG investing allows you to invest your capital in funds that participate in sustainable development. On the performance side, investing in these types of funds may allow for you to benefit from a better return; companies that integrate ESG criteria are less exposed to sanctions related to non-compliance with certain environmental regulations and to crises driven by practices that disrespect the rights of employees.

How to Build a Portfolio of ESG Investments?

Given the advantages offered by ESG investing, it is preferable to invest in companies that meet certain environmental, social, and governance thresholds. However, choosing such companies is not an easy process, courtesy of the following two main reasons;

  • ESG criteria are not the same from one country to another. In some countries, a company can benefit from an excellent rating by playing the transparency card in terms of salaries, without worrying about the environmental impacts of its activity.
  • Information communicated by companies on compliance with ESG criteriais not certified. A company can therefore share skewed figures to prove its compliance with ESG factors.

To choose funds that meet all or part of the ESG criteria, you must sort the companies and take certain indicators into account in your analysis.

Several SRI strategies allow you to sort and choose companies and funds that integrate ESG criteria. If you need help with this, be sure to consult your financial professional for clarity and guidance.