When it comes to investing, there are a multitude of factors that come into play – everything from the company’s reputation to tax rates to international conflicts. The latest trend in responsible investing is the incorporation of environmental, social and governance (ESG) factors. ESG factors can include things like a company’s view on climate change, their employee health and safety policies and their corporate culture, and is used by “socially conscious” investors to help them in their financial decision-making.
Since ESG investing involves screening companies based on social factors in addition to financial valuation, it encourages companies to act responsibly. As a result, additional investors become interested in investing in companies that are viewed as socially responsible, which promotes increased responsibility, which attracts more investors and you can see where this is going. In the end, the company’s valuation as well as their capital options increases. Furthermore, not only are ESG practices beneficial to shareholders, but to company employees as well. A company with high ESG performance means that their employees are receiving salaries above a living wage, that the company’s culture is safe and non-toxic, and that there is an emphasis placed on employee wellness.
Speaking of employees, not all ESG practices are equal. For example, some companies focus on the environmental aspect of ESG and employ sustainable water and waste management policies. However, this is relatively simple and can be employed by any company. It won’t necessarily provide the company with an edge in terms of their ESG score. However, a social factor like incorporating ESG policies into the recruitment and retainment of employees is a bit more difficult to do. For example, skincare company Neutrogena has been praised for their “thoughtful” company culture. According to the company, the average tenure at Neutrogena is approximately 10.2 years. This impressive employee retention rate has been attributed to things like the company’s emphasis on work-life balance, health benefits and creating a collaborative culture. These factors place companies like Neutrogena, Google, Airbnb and others on a much higher level when it comes to ESG scores.
ESG practices are also extremely helpful when it comes to financial valuation in the global market. Studies by financial analysts have found that companies with strong ESG disclosures benefited greatly in the stock market when the European Union announced stronger disclosure requirements. This was especially beneficial for countries with strong ESG disclosures that were considered emerging markets such as South Africa and Brazil.
Overall, ESG practises serve great benefits to companies, but the ultimate question is – do companies actually implement these practices? One report from earlier this year stated that 90% of the companies included in the S&P 500 published some form of ESG reporting in 2022. The impact of placing importance on ESG can also be seen in studies that track the flow of investments. For example, sustainable funding inflows went up from $5 billion in 2018 to $50 billion in 2020. Lastly, with increases in awareness of social justice issues, financial analysts also found that socially-conscious investment proposals went up 37% from 2021 to 2022.
ESG-based investing is still relatively new in the financial world. On one hand, despite data showing the benefits of ESG practices, experts agree that most companies treat ESG as extra padding. Something that is nice for extra protection, but not necessary. On the other hand, it may still be too early to make conclusions about the integrity and longevity of ESG practices. As ESG becomes more popular, the already substantial influence that corporations have on the global political and social framework has the potential to be a real force of change in the world. Whether that change will be good or bad is yet to be determined.
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