Invest in what you know is a common piece of investment wisdom. In the past, that advice has most likely referenced your favorite soda or retail store. Today, however, more people are investing in actions and causes they champion, and this is true of companies, as well.
For example, while the current U.S. administration is rolling back some environmental regulations, many corporations are moving forward with their own sustainability policies, believing that they may contribute to long-term financial success.
Mainstream interest in such environmental, social and governance (ESG) investing is growing. Today, it’s estimated that more than $20 trillion is invested in ESG vehicles, which represents about 25 percent of all professionally managed assets worldwide.1
While the term ESG was first coined in 2005, the Socially Responsible Investment (SRI) movement has been around much longer. SRI generally uses ethical and moral screens to select investments, such as weeding out companies that produce alcohol, tobacco or firearms.2
However, ESG is more focused on factors with financial relevance. This includes considering how corporations respond to climate change or engage in water management, supply chain selection, health and safety policies, and ethical employee treatment. While these issues may fall under the ESG purview, many also are recognized as simply good management practices.3
Consequently, the first criteria for ESG investment managers is to examine how companies are managing social and environmental issues. Once that screen is implemented, they evaluate companies based on their financials. Part of this analysis is designed to understand how a company is positioned to respond to environmental, social and governance disruptions. This is part of the equation in projecting a company’s long-term value.4
Initially, ESG focused on actions investors could take as equity owners to influence more sustainable practices. Now, ESG is poised to make inroads in the fixed-income market. According to ESG investment experts at PIMCO, many mainstream institutions are launching ESG bond funds, believing these companies recognize that effective management and integration of sustainability policies can yield stronger cost efficiencies, productivity gains, new revenue and product opportunities, as well as reputational benefits.5
1 Georg Kell. Forbes. July 11, 2018. “The Remarkable Rise Of ESG.” https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/. Accessed Aug. 10, 2018.
4 Christopher P. Skroupa. Forbes. Aug. 9, 2018. “The Present And Future Of Nordic ESG Practices.” https://www.forbes.com/sites/christopherskroupa/2018/08/09/the-present-and-future-of-nordic-esg-practices/. Accessed Aug. 10, 2018.
5 Mike Amey and Gavin Power. ETF Strategy. July 4, 2018. “ESG Investing and Fixed Income: The Next New Normal?” https://www.etfstrategy.com/esg-investing-and-fixed-income-the-next-new-normal-47839/. Accessed Aug. 10, 2018.
Content prepared by Kara Stefan Communications
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