Sustainable businesses are now driving investment. As noted by Bloomberg, assets under management (AUM) tied to companies with superior environmental, social and governance (ESG) practices in place are on track to reach $53 trillion by 2025, which represents one-third of AUM worldwide. But what exactly are ESG and ESG Investing? Why does it matter to businesses, and what steps can they take to encourage external ESG investment?
What is ESG?
ESG is a measure of the total impact a business has — both positive and negative — on the environment and society. Business governance is a key component of this impact; as a result, governance processes are foundational to effective ESG.
Businesses with a positive ESG rating impact take steps to reduce negative actions and increase positive impacts across the organization. From an environmental standpoint, this might mean a shift to more sustainable packaging or a focus on reducing waste during the production process. From a social perspective, this could take the form of responsible materials sourcing and logistics that relies on reputable and transparent partnerships. When it comes to governance, meanwhile, current workplace methodologies around executive pay, board composition, and response to market volatility are all key factors in assessing ESG performance.
What is ESG Investing?
ESG investing is the process of companies and individuals — such as investment and pension fund managers — investing in publicly-listed companies that score highly on ESG assessments. Also called sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI), this practice has become commonplace in recent years as business and finance managers look to align themselves with businesses committed to improving environmental and social conditions.
As noted by Forbes, ESG investing strategy often goes beyond the acronym itself to evaluate how businesses serve five key stakeholder groups: The environment, company shareholders, customers, communities, and workers.
Why Does ESG Investing Matter for Businesses?
ESG investment decisions matter for businesses because more and more asset managers, mutual fund managers, and investment firms now recognize the impact of ESG efforts on consumer sentiment and buying preferences. Companies that can demonstrate their commitment to ESG efforts are now more likely to attract and retain new customers, in turn driving greater customer lifetime value (CLV) and making these companies a more stable investment for ESG investors. Superior ESG performance also indicates that a company understands and manages risks in association with its key stakeholder groups and thus is likely to be a better long-term investment.
As the demand for ESG-positive operations grows, meanwhile, businesses also face the challenge of ensuring that practices live up to expectations. Why? Because if they fall behind the curve, investors will take their money elsewhere and evolving public sentiment may make it challenging to cultivate a stable customer base.
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How Companies Can Encourage ESG Investing
To encourage ESG investment opportunities businesses need to accurately assess their ESG impact, and regularly re-assess operations to ensure practices continue to have a positive impact.
The investment process starts with a broad assessment of ESG factors individually:
Environmental factors
Environmental assessments include an examination of the natural resources used by a company, their impact on biodiversity, climate change, and emissions, their overall risk to the environment, and current compliance with any local, state, and federal environmental regulations. These assessments may also include evaluations of renewable energy efforts that help offset carbon emissions tied to the use of fossil fuels.
Social factors
Social assessments evaluate corporate respect for and observance of human rights, fair working conditions, and hiring practices — especially during the pandemic — ongoing local community relations, and overall customer satisfaction.
Governance factors
Corporate governance assessments examine current board structure, diversity, independence, board transparency, data protection efforts, and financial compliance along with any lobbying efforts or political contributions that may impact business practices.
Given the growing complexity of business operations and ESG efforts, it’s worth starting with ESG checklists that help companies quickly assess their own performance and that of suppliers. More in-depth assessments, meanwhile, are often best served by robust ESG assessment software that makes it possible for teams to evaluate ESG efforts across their entire business and supply chain, collect data in real time, and create custom checklists for internal processes, external suppliers, and third-party providers.
Investing for the Future
ESG investment products offer stable, steady, and socially preferable options to traditional investment — as a result, they’re often preferred by portfolio managers thanks to steady financial returns. For businesses, the rise of ESG investing highlights the need to ensure current processes are living up to expectations and ongoing efforts help generate ESG investment over time.
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What is Environment, Social, Governance (ESG) and Why it’s Important
