Those who are interested or are in association with any part of the financial industry are familiar with ESG investments, what it is, and how it works. But for all others that don’t follow business trends that much, all of that may sound strange.
Responsible investment, often abbreviated ESG, is getting high popularity among people interested in how financial systems work, and since it is that important and since responsible investment brought many changes, there are some things that everyone should know about, as it is about all of us, and we can all find it useful. ESG has many benefits, which is why we will further expand this topic and learn more about its advantages.
What is ESG investment?
To first clear something up, the ESG is not short for a company of any kind, even if the name itself may sound like it. The ESG stands for environment, social management, and governance. This new way of responsible investment means that anyone can invest their money in business and companies where they will feel good and earn money. Now let’s see how and what each letter practically means.
When someone mentions the environment, the instant thought is about climate and all the changes going on, but combining them with finance, it does not only mean that someone is investing money in those companies that are solely about ecology and making the environment cleaner per se. It includes making a clear distinction between companies with strong policies about resources management, waste deposits, and climate change and those who are not that environment friendly. That is why fossil fuels are at the top of the industries with a large pollution ratio, and avoiding investing in them, prevents you from participating in all that.
Social activism and our social consciousness and awareness are at their highest today, which means that some questions that were and, in some way, still are avoided, we now deal with them. With ESG investments, one can be sure that they are investing in firms that have strong policies about equal payments, pay prevention, prevention of sexual harassment, and much more. Of course, companies that are active about some important social issues should and always have an advantage when choosing where to place the capital.
In modern society, management (or governance) is highly significant. Whether some company has a clear position about which personnel is responsible for a specific part of the company could be of great importance when investing money. In every company, the board of directors is responsible for that governance and whether an appropriate governance structure is in place. Everyone has certain roles, duties, and responsibilities, and separating the position of the president, CEO, and other staff members can be beneficial in many ways, not only for the company itself but for everyone who wants to invest their funds. When everything is at its best, it improves transparency, which is crucial for shareholders, as they will at any time know everything they should and exactly what is going on.
Now, let’s take a closer look at six major advantages the ESG investment brought to the financial world.
1. It reduces the risk
This works in such a way that by investing in companies that care about the environment and climate, you can reduce potential future risks involving climate changes, as those companies will surely be more prepared for that. Another thing that has a great impact on how that risk gets smaller is that if the company treats their employers and business partners fairly, it means that they would always find a way to overcome any problem in the future. Of course, separating the role of the chairmen, CEOs, and board members is yet another advantage in how one company can make the future bright, as transparency is always a great way to change things for the better.
2. It increases the value
When everything runs like clockwork, and when everything is transparent, it makes potential investors more sure about the company’s potential. In which way will some businesses advance, adjust to market changes, and how, and will it adapt to possible new things has never been more clearer in one company than it is now with those who promote ESG advocacy. All that has a large influence on those companies’ value as the number of people willing to invest in them increases, along with the fact, confirmed by many studies, that their performance is positively influenced by good sustainability.
3, Encourages younger people, attracts and retain the best talent
Since today, more than ever before, we are aware of the environment and social responsibilities, and since millennials care deeply about those questions, it is very important for them to work for a company that embraces their values and shares their views. When that happens, it increases the chances for the company to get the best and talented people available.
4. It can increase stock liquidity
There are many studies and indexes that rank companies by the ESG criteria. As you can see, today, ESG means that a company doesn’t only care about money and investments, it cares about all the things involving people and their surroundings, which is why 99% of investors would likely to place their funds in those companies. Furthermore, many of them have their ESG evaluation when calculating a risk assessment, which means that it is a trend that is not going to end soon.
5. The better the labor conditions, the better the productivity
There is nothing new to tell, and we all know that good labor conditions influence productivity. All that further leads to not only more money but also strengthens the position of one brand.
6. Investments that make you feel good
Everyone heard the saying, “Money makes the world go round.” But today, what ESG stands for also has an immeasurable impact when investors are making a decision in what to invest. Everyone wants to make money, but when there is an option to achieve that and also feel good about yourself, everyone will choose that option.
These are only some of the advantages of ESG investment, and as we can see, it is something that has a huge role in the modern financial system. Understanding how significant this is, is crucial for every company as well as investor, and if you want to learn more about that, check amakella, where you can find everything on this and many other topics.