Investment choices made based on environmental, social, and governance (ESG) factors are becoming exponentially popular. The growing interest from retail investors and institutions is becoming too big to ignore. So what is ESG investing and how will it affect the future investing landscape?
What is ESG Investing?
ESG investing, also known as socially responsible investing, impact investing and sustainable investing, gives investors the ability to prioritize environmental, social and/or governance change in publicly traded companies, either through direct investment or sustainable exchange-traded funds (ETFs). An ESG investment strategy targets industry leaders in three categories:
- Environmental impact
- Social responsibility
- Governance issues.
Let’s further define each of these categories.
Environmental impact includes things like a company’s carbon footprint, sustainability efforts in manufacturing, and awareness of toxic chemicals involved in production. A company with a high rating in the “E” category is one that actively engages in the fight against climate change by striving to reduce its environmental impact as much as possible.
Social responsibility is the commitment made by companies to adhere to certain values that impact people around the globe. Companies that score high in the “S” category generally promote gender diversity, access to affordable healthcare and support of the LGBTQ+ community.
A high score in the “G” category is earned by companies with individuals in leadership positions that drive positive change. When it comes to governance issues raised by shareholders or employees, the board of directors of high scoring companies will interact with shareholders and employees by seeking to understand and address their concerns.
Growth of ESG Investing
The intrigue surrounding ESG investing has grown exponentially in the last three years. According to a report by Morningstar, sustainable ETFs garnered over $50 billion of net flows in 2020, which is more than twice the previous record set in 2019. Additionally, the report stated that the number of sustainable ETFs available to U.S. investors climbed to 392 in 2020, a 30 percent increase from 2019.
Environmental-focused funds are in particularly high demand within the sustainable funds category. With climate change becoming an increasing concern among Americans and across the globe, retail investors are pouring record amounts of cash into funds with labels such as “low carbon” and “environmental.” Institutional investors are following suit and shifting their focus to environmentally conscious investments. The BlackRock U.S. Carbon Transition Readiness ETF (LCTU) raised $1.25 trillion in assets on its first day of trading, marking the largest ETF launch of all time.
The Future of ESG Investing
What does the future hold for ESG investing? Investors’ desire to protect the environment is increasing every day, along with the importance of addressing social justice issues around the globe. ESG investing represents a powerful vehicle that could be used to drive improvements in the climate, society and the way businesses are managed.
Alexandra Cichon, executive vice president at RepRisk, firmly believes that ESG investing will soon be the norm. “I expect that ESG as a term won’t exist as a separate, siloed concept; it will be fully incorporated into the investing process,” says Cichon. “In other words, ESG investing will just be the way that asset managers and others do their work; ESG won’t be something extra or special in financial decision-making,” Cichon added.
A financial advisor can help guide your investment choices with high ESG ratings. The key is to ensure that choices you consider are aligned with your investment goals. If you are interested in exploring ESG investing strategies, let’s talk!
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