Modern investors care about the ways that corporations impact the world. Environmental, social, and governance (ESG) investment concepts are now influencing corporate behavior globally.
Responsible investing is about more than just making money. Instead, it’s about making money without causing harm to the environment. In best-case scenarios, ESG investors’ money will improve the world by positively impacting communities and the environment without sacrificing returns.
Here, Eddie Listorti, CEO of Viridios Capital, shares how ESG concepts are changing corporate behavior worldwide.
Integrating ESG Strategies into Investments
Sustainable investments involve a variety of concepts and strategies. Common ESG investing tactics include:
- Not investing in companies that violate certain ethical norms, like the UN list of Ten Principles;
- Eliminating companies with unacceptable practices or objectives;
- Selecting companies to invest in based upon their commitment to ESG principles;
- Investing in corporations with sustainable practices, including those focused on renewable energy;
- Selecting companies that positively impact ESG categories while still performing well in the market;
- Integrating ESG principles into any investment analysis;
- Taking ownership of investments.
Investors once believed that socially responsible investing (SRI) meant taking a modest loss on their investments. Current data indicates that this perspective is inaccurate and outdated.
ESG Investments Yield Returns
Studies show that ESG investment strategies offer financial returns. The Harvard Business School illustrated that ESG-concerned companies outperformed a control group over eighteen years. Another study found that companies that performed best in ESG categories performed 40 percent better than those with the lowest ESG ratings.
Bank of America Merrill Lynch reported in 2018 that companies with top ESG ratings produced better returns than others, were less likely to declare bankruptcy and were also more likely to develop into quality stocks.
Client demand for ESG investments is also on the rise. While ESG proponents once had to work hard to convince colleagues about the merits of this investment strategy, many influential industry leaders can now focus on the best ways to integrate ESG tactics to improve investment value efficiently.
Some companies like Danone in France are now reporting carbon adjusted earnings per share using their internal price for carbon. Their adjusted earnings per share growth has grown faster than its headline earning per share growth, in 2019 that was 12% versus 8.3% and all because the company has been reducing its carbon intensive activity.
Challenges to ESG Investing
One major hurdle for ESG investing is the ability to gather reliable data on company sustainability practices. Companies report about their practices, but they gear their data toward NGOs and not investors.
Some organizations are beginning to gather data, and some companies choose to release helpful information voluntarily. Unfortunately, without independent oversight to verify that information, it may lack reliability. Thus far, governments are not requiring audits of relevant information from corporations.
Although there is room for improvement in data reporting, the landscape is changing. ESG-minded investors will be able to find increasingly reliable data to support their objectives.
Experts believe that the ways that investors evaluate companies are changing. For the corporate world, it will be essential to rise to the occasion. Any long-term strategy should consider the value that a company creates for society, not just ways to increase profits.
About Eddie Listorti
Eddie Listorti got his Bachelor’s Degree in Economics from Newcastle University and has completed several courses in financial modeling and sustainable finance at the Cambridge Institute for Sustainability Leadership. His wide range of expertise includes FX trading, fixed income, commodities, carbon trading, and investment banking, to name a few.