ESG and the Investor
Investing in ESG
Research shows that Environmental, Social, and Governance (“ESG”) investing can add value to a portfolio while also benefitting an organization’s varied stakeholders. Many investors feel that incorporating ESG criteria into their investment methodology yields positive results that go beyond just the ethical aspects, and can actually drive improved portfolio stability with higher returns.
Increasingly, investors are seeking out organizations that prioritize long term sustainability and uphold higher standards of both operating and social practices. Investment managers are putting pressure on corporate leaders to adhere to, and report on, these sustainability initiatives. With the ESG investing landscape changing so rapidly, it is important for both investors and issuers to be aware of the role it plays in capital markets.
What is ESG Investing?
ESG investing has no strictly defined meaning. Whether it is done through negative screening, ESG integration, or impact investing, it generally involves basing a portion of one’s investment decisions on criteria related to the three key segments, including (but not limited to):
- Environmental: climate change impact, emissions, water and waste management, land and biodiversity disturbance, energy use, and natural resource scarcity.
- Social: workplace diversity and inclusion, health and safety, ethical supply chain, community relationships and giving, talent management, and other human rights matters.
- Governance: accountability and oversight, stringent accounting methods, executive compensation, internal controls, and shareholder rights.
The Ups and Downs
Companies who commit to voluntary ESG reporting tend to disclose a much broader array of performance metrics across operating, financial and internal culture aspects, which lends greater transparency for investors. In turn, by incorporating ESG factors when deciding on where to allocate capital, investors may be able to avoid companies where internal practices are not sufficiently robust to minimize investment risk. In addition to the potential economic impact ESG can have on a portfolio, shareholders may also realize stronger social value based on positive societal impacts being advanced by their company investments.
However, ESG investing is still in its early stages and reporting is not yet standardized which leads to challenges in ensuring comparisons are ‘apples to apples’. Additionally, considerable time can be required by investors to filter through new and unfamiliar metrics to understand their impact on an organization’s operations/financials.
At 5Q, we’re excited to see what the future holds when it comes to ESG Investing as more universally accepted reporting standards come into place. We are proud to have partnered with numerous companies who are either beginning their sustainability reporting journey, or who are continuing to evolve it through innovative reporting materials. As further regulations are implemented to enhance disclosure, the team at 5Q can work with your organization to provide ESG reporting support. Contact us today to see our portfolio of past ESG reports and to learn more about working with our team!