Why ESG performance is growing in importance for investors (2024)

FAQs

Why ESG performance is growing in importance for investors? ›

The COVID-19 pandemic has reinforced the importance of ESG issues and accelerated the transition to a more inclusive capitalism. Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.

An ESG criteria is thought to help investors consider the 'unmeasured' or 'unrepresented' environmental, social and governance topics when making investment decisions. It reveals data that traditional financial analysis doesn't usually capture, speaking to a company's sustainability in its broadest sense.

Environmental factors encourage investors to consider how companies manage their impact on our planet, through issues such as greenhouse emissions, waste and pollution, resource depletion and deforestation.

Examples of how ESG risk management and performance improvement can lead to better financial performance include: Greenhouse gas (GHG) emissions: Prioritize assets to decarbonize based on emissions intensity (focus on highest emitting operations) and potential for business disruption (contribution to company revenue)

Investors have a range of strategies at their disposal to engage corporate management and to communicate their views on corporate ESG risks to policy makers and the broader public. The most common strategies are direct dialogue, shareholder proposals and proxy voting, public policy engagement and divestment.

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

The Bottom Line. ESG investing focuses on companies that follow positive environmental, social, and governance principles. Investors are increasingly eager to align their portfolios with ESG-related companies and fund providers, making it an area of growth with positive effects on society and the environment.

Retail investors buy securities when the implications of ESG news for a firm's performance are positive; conversely, they sell those securities when the implications are negative for portfolio performance.

To win investors over on sustainability, first understand their mindset. Some chase financial returns, others prioritize eco-social impacts. Recognizing this diversity is key. Tailor your approach: for the return-focused, highlight sustainability as a risk mitigator and long-term value creator.

Sustainability reporting creates numerous advantages, including the enhancement of risk management strategies, the optimization of costs and savings, the streamlining of decision-making processes, and the bolstering of corporate trustworthiness and reputation.

What is the role of ESG in investment strategy? ›

This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.

ESG investing is widely seen as a way of investing “sustainably”—where investments are made with consideration of the environment and human wellbeing, as well as the economy.

ESG assets have higher valuations today if their systematic risk is reduced, and therefore they should have lower expected returns for investors in the future. Investors hold ESG assets because they hedge climate and social risk.

Tying ESG to value levers

Waste reduction and energy efficiency can save operating costs. Addressing climate risk in supply chains and physical infrastructure can also help prevent losses, reduce insurance costs, and avoid negative hits to shareholder value due to write-offs.

We find evidence that ESG is related to decreased risk and a more favorable risk-return tradeoff. These results are most significant for the governance score. There is evidence that higher environmental scores are related to overpriced securities.

9 in 10 asset managers believe that integrating ESG analysis into their investment strategy will improve long-term returns, and a majority of institutional investors have reported that their ESG products have outperformed traditional counterparts.

Institutional investors – and asset managers acting on their behalf – use ESG ratings and scores to help them make allocation decisions aligned with their values, risk management goals, and long-term performance objectives. Other financial institutions, such as banks and insurers, also consider these metrics.

ESG reporting is all about disclosing information covering an organization's operations and risks in three areas: environmental stewardship, social responsibility, and corporate governance. Consumers look to ESG reports to figure out if their dollars are supporting a company whose values align with theirs.

The materiality of ESG Risks: Understanding the materiality of ESG risks is crucial for financial analysis. This involves identifying and assessing how environmental issues, social impact, and governance factors could significantly influence a company's financial condition or performance.

The primary reason survey respondents consider ESG information in investment decisions is because they consider it financially material to investment performance. ESG information is perceived to provide information primarily about risk rather than a company's competitive positioning.