The E in ESG

The introduction of ESG has become a topic of discussion, however not many of us know what it means and how it relates to providing solutions to problems caused by climate change. This article is one of three that will help you understand ESG and its revelance to today.

Everyone is talking about it, but what does it really mean?

The environment aspect, or E term in ESG, is aiming to combat current environmental issues and reduce the probability of future negative implications on the environment caused by unsustainable operations. With firms being able to implement E centric ESG programs through positively contributing to causes such as globally reducing emissions, combating climate change, and decreasing their negative environmental impacts through means of sustainability programs.

Environmental issues is a broad topic, how do companies specifically make a difference through their ESG?

Most commonly, environment focused ESG programs aim to mitigate and minimise a firm’s negative contributions toward climate change. Firms facilitate this through the establishment of sustainability programs and commitments to reducing negative externalities of their production. Some ESG programs which aim to achieve these outcomes are, committing to switching to renewables (energy, sustainable materials), reducing product waste, and rejuvenating natural landscapes which have succumbed to industrial development.

How is the space growing and what are the trends like?

Growth in interest in companies with strong ESG programs has increased exponentially within the past 5 years, with previous year’s growth rates of ESG assets under management being at 30% p.a, and the total ESG assets under management being projected to reach $50 trillion by 2025 (1). Given this extremely fast paced rate of growth within the ESG asset space it is apparent that the population of environmentally inclined investors is rapidly expanding, and it may not be surprising to find out that millennials are at the forefront of this change. With 95% of millennial investors stating they were interested in sustainable investing in a 2019 Morgan Stanley survey, it is unsurprising to see who the driving force behind this shift within financial markets is (3).

This all sounds great but why would I care about potentially investing in the space?

There are three main reasons one may consider investing in a firm with standout environmentalist programs.

  1. Investing in environmentally sustainable companies means investing consciously with your ethos in mind. E centric ESG investors can receive satisfaction knowing that their investments are directly contributing towards the fight against climate change.
  2. A recent study from S&P global has shown that ESG ETF’s (exchange traded funds) are outperforming the broader index, with this phenomenon occurring most recently between 2020–2021 (4). The incentive to invest in environmentally conscious companies/funds now is not only there for investors who are seeking the satisfaction of knowing they are investing ethically, but it is also there for investors who are seeking greater returns in general.
  3. A company which has these sustainable programs in place is future proofing it’s corporate strategy. With the Paris Climate Agreement securing the role of government intervention in reducing the extent to which climate change may occur, there is an inevitable threat of a government crackdown on unsustainable business models which pose harm to the environment (2).

This article was researched and written by our brillant Publications Writer, Roy Nelson. Stay tuned for another couple of articles in this series of three that will aid your understanding of ESG.

References

  1. ‘ESG assets may hit $53 trillion by 2025, a third of global AUM’ — https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/
  2. ‘The Paris Agreement’ — https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
  3. ‘Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice’ — https://www.morganstanley.com/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf
  4. ESG funds beat out S&P 500 in 1st year of COVID-19; how 1 fund shot to the top’ — https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/esg-funds-beat-out-s-p-500-in-1st-year-of-covid-19-how-1-fund-shot-to-the-top-63224550

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