Things to consider when investing in ESG

Things to consider when investing in ESG

ESG investing has seen consistent growth over the last two years. Inflow into ESG funding in 2021 surpassed the 2020 figure of USD $51.1 billion. It is currently estimated that assets valued at $330 billion are currently managed by ESG funds with this figure expected to rise.

Environmental, Social and Governance (ESG) criteria are prioritized by investors who strongly consider non-financial factors when assessing a potential investment opportunity. These factors are often critical to identifying material risks and growth opportunities. ESG metrics are not mandatory to disclose, however, with the benefits organizations experience with strong ESG rankings, a growing number of organizations are volunteering this information.

With the rising interest in ESG criteria, a growing number of institutions are looking to establish global standards and design materiality to help qualify and quantify ESG investments. These institutions include SASB (Sustainability Accounting Standards Board), GRI (the Global Reporting Initiative) and TCFD (the Task Force on Climate-Related Financial Disclosures). 

E or Environment - Accounts for the footprint an organization has on the surrounding environment and sustainable practices.

S or Social - Assesses an organization's ability to positively impact surrounding communities. This includes ensuring equal treatment and advocating for fairness beyond business environments.

G or Governance - Understands how a business brings in change and their stance on leadership. Governance is not only limited to internal activities but also understands whether a business is compliant with governing standards to prevent future fines or legal action.

Responsible investing allows investors to contribute positively to the environment and society while accounting for profitability. In today’s corporate climate, social values, ethical investing and the social impact of the same can extend a company’s shelf life or bring them faster expiry dates. 

How To Spot A High Ranking ESG Investment

As previously mentioned, internationally shared standards are not well established and are instead currently being worked on. In the meantime, investors can recruit ESG consulting firms or freelance ESG advisory services.  

These organizations are equipped with useful metrics that investors can use to compare opportunities. ESG scores are often ratings research firms assign to organizations based on multiple criteria used to evaluate each component of ESG. 

The scores are often shared based on a 100-point scale. When organizations score higher, this indicates stronger decision making accounting for ESG impact. It is important to note that scoring systems and assessment metrics will vary based on your choice of research firm.

Factors ESG rating firms account for include;

• Annual reports
• Corporate sustainability measures
• resource/employee/financial management
• Board Structure
• Compensation
• Corporate Culture 

Conduct Your Own Research 

Investors must do their own research to decide whether a business is truly a strong ESG investment. While accounting for the information shared by research firms, also consider looking at the various outlets that share “best of lists”. Identifying globally or nationally recognized top ESG-rated stocks could bring to light better investment prospects.

It would be helpful to investigate organizations that do not hold an ESG ranking. While the process to understand how the company and ESG criteria work together will be more time consuming, a hidden gem could uncover itself. 

While accounting for ESG characteristics is critical to a  strong investment, investors must also account for traditional metrics including costs and expenses. 

Understand The Criteria Where You Are

ESG criteria will differ from region to region. It is important to understand what your country or governing body deems a favorable ESG investment and measure the same against your investment goals, the type of portfolio you are looking to build and alignment of the prospect with your asset allocation strategy is critical to finding the right investment. 

Looking at robo-advisers who work with a sharp eye on ESG factors will help maintain your sights on viable investments. Robo-advisors include Betterment, Ellevest, Wealthsimple, Sustainfolio, Earthfolio and OpenInvest.

The process to secure the right ESG investment is as intimidating as securing investments in general. Approaching opportunities with an open mind and a strong foundation of information could help you secure the next big ethically operating organization creating recurring revenue for years to come.