Socially responsible investors are primarily concerned with environmental, social and corporate governance issues (ESG). Their opinions and concerns (such as environmental issues) must be taken into account “when making investment decisions, rather than focusing solely on the potential profitability and/or risk of an investment opportunity”.
ESG categories contain a variety of concerns that may or may not be important to an investor depending on the particular investment. Pollution or garbage generated by businesses, for example, fall under the category of Environment, as do climate change-related concerns.
What is ESG? Socially responsible investments, often known as ESG investments, go by a number of names, including sustainable investments and impact investments. They attend shareholder meetings and try to sway corporate policies and practices.
As a result of these criticisms, ESG investing is increasing in favor, especially among millennial. 100 percent of millennial investors want to invest in assets that are aligned with their values, according to a new Morgan Stanley Bank (NYSE: MS) survey.
Over 13 trillion dollars in investment assets are expected to be allocated to a socially responsible investing strategy by 2019. Investors can expect ESG investments to grow along with millennial, as they become a larger part of the overall pool of investors.
To meet the growing demand for ESG investments, the finance sector has developed ESG-focused exchange-traded funds, for example (ETFs). ETFs that focus on environmental, social, and governance (ESG) problems are available from both BlackRock and Vanguard. In addition, in 2020, it will add a new Head of Sustainable Investment to its equity investment team. Wealthfront and other robo-advisers may be programmed to search for socially acceptable assets.
Although ESG indicators are not presently required in “publicly traded companies financial reports a rising number of them proudly incorporate them in their reported statements or a separately released document”.
Is Socially Responsible Investing (SRI) an Effective Investment Strategy?
According to detractors, the socially responsible investing movement detracts from successful investments and causes firms and financial institutions to operate inefficiently. The father of neoclassical economic theory, Milton Friedman, was a strong opponent of ESG investing. Friedman stated that when analyzing a stock, “the primary focus should be on the company’s financial worth and bottom line profitability and that socially responsible corporate expenditures are almost always “non-essential expenses” that eat into corporate and shareholder earnings”.
Many proponents argue that socially responsible investments are both “the right thing to do” and likely to offer investors with the highest return on investment over the long run (ROI). Co-founder of Sustainability, a firm that provides organizations with ESG consulting services, John Elkington is an expert in the field of sustainability. As a proponent of adding non-financial variables into stock price, “he is a strong proponent of including environmental and social considerations”.
After Friedman’s death, in 2020, the US Department of Labor will require retirement plan fiduciaries to execute investment plans based only on bottom-line investment performance. As a result of the recent judgments, “retirement plan managers may be hesitant to allow ESG-focused firms or investment funds into their plans”.
The ESG Procedure
Ecological, social, and corporate governance (ESG) investing each has a set of criteria that socially conscious investors or businesses wishing to take a more ESG-friendly approach to their operations may use.
Despite the fact that many ESG criteria are subjective, much is being done on a variety of fronts to provide more objective, accurate assessments of an organization’s success in terms of its ESG policies and operations.
Previously, the ESG ranking of a firm was frequently decided more by its public relations department than by its real activities. We provide ESG consulting services to organizations that wish to create ESG-friendly policies, for example.
- ESG Environmental
“Environmental problems include a company’s use of renewable energy sources and waste management plan”, how it addresses any air or water pollution produced by its activities and deforestation difficulties.
Another significant environmental challenge is procuring raw materials and managing biodiversity on the land it controls or owns.
- ESG Social
We can investigate a wide range of societal concerns. The ESG has a number of social components, but it is mostly about social relationships that are made. Socially conscious investors view employee connections as one of the most essential relationships a firm may have with its employees. Think about how a firm maintains its social links:
- What additional benefits or incentives are provided to employees in addition to their basic income or salary? ESG investors may place a higher value on your company if you provide benefits that aren’t common in other workplaces, like as an on-site fitness center.
- Is the employee’s salary realistic, if not lavish, in comparison? What types of retirement plans are accessible to employees? If yes, what is the firm’s contribution?
- Disagreements abound when it comes to workplace rules on diversity, inclusion, and sexual harassment.
- How outspoken is the company when it comes to human rights concerns? Is it a non-profit or a government agency?
- How successfully do you manage your customer connections with your business partners and customers? Is the company using social media to engage with its customers? In what time frame and with what level of efficiency does the customer service department respond? Consumer protection problems such as product recalls have the corporation in the past?
- ESG Governance
In the context of ESG, corporate governance refers to how a company’s upper-level executives administer it. “How effective is senior management in protecting the interests of the company’s stakeholders such as employees shareholders and customers. In which community does the company conduct business”?
Corporate governance is commonly seen as a function of financial and accounting openness, as well as comprehensive and honest financial reporting. A true fiduciary relationship with investors must also be maintained, and conflicts of interest must be avoided.
It is a good sign if there’s a diverse and open board of directors and senior management.
Numerous ESG investors are against multimillion-dollar incentives for CEOs while the business maintains salary limits for all other staff. Are a company’s long-term worth, viability, and profitability adequately impacted by the CEO’s pay?
This is an excellent illustration of how Intuit employs ethical corporate governance. Some businesses demand senior executives to buy stock worth ten times their yearly pay. This guarantees that they are invested in the success of the firm rather than simply receiving quarterly incentives.
The compensation of executives is also based on factors other than earnings or sales figures.
