How ESG and sustainable investments are changing investments, businesses 

May 15, 2021 12:45 AM AEST | By Suhita Poddar
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  • In last one decade, the countries worldwide have been promoting ESG issues.
  • Studies have proved that an efficient ESG strategy can see a growth in profits and also make your business more future ready.
  • Studies have stated that ESG ratings have a positive impact on a company's performance and can mitigate financial risk

There is no doubt that more and more investors are looking to integrate sustainability insights in their portfolio, which is a major shift in investment pattern over the years.  It is known fact that every business or job have an impact on our planet, and it is impossible to ignore the effects of climate change and plastic pollution. In last one decade, the countries worldwide have been promoting ESG issues and trying to bring the pattern in the businesses. ESG stands for environmental, social, and governance, and can be defined as a set of standards that measures a business’s performance in terms of carbon emissions and social responsibility.

Nowadays, investors increasingly getting more vigilant about these non-financial, but crucial factors as part of their investment analysis to identify risks and growth scope of a company or a product.

ESG is part of a bigger net that is sustainable investing, which can be defined as a modern and inclusive way of adopting values in investing. Apart from ESG investing, sustainable investing covers ethical investing, impact investing, socially responsible investing (SRI), values-based investing, and green investing.

Basics of ESG Investing

Though there is a debate that whether ESG investment is a serious commitment or a blind spot, studies have proved that an efficient ESG strategy can see a growth in profits and also make your business more future ready. A McKinsey Research has stated that an effective ESG strategy can affect the growth and operating profits of a company by almost 60%.

ESG investing makes investors focus on the three basic factors: Environmental, Social, Governance. These factors help the investor gauge company's performance, and these factors would impact their investment.

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Going by data, the Emerging Portfolio Fund Research report stated that SRI and ESG investments have gone up to US $168.74 billion in 2020 from $63.34 billion in the year 2019. According to a 2019 Morgan Stanley survey, around 85% of retail investors are keen on sustainable investing. And not just that those companies which support or have adopted green measures and low-carbon technology are more future-ready, a report by investment research company Morningstar stated, and therefore, investors tend to choose them over other companies.  

Studies have stated that ESG ratings have a positive impact on a company's performance and can mitigate financial risk with the adoption of sustainable practices. In recent years, companies which focused on ESG investment grew more than US$30 trillion, according to the data available with Global Sustainable Investment Alliance.

 Why to consider ESG investing

In today’s world, especially after the pandemic, most investors are keen on building up assets in areas which will help in promoting global issues like climate change and sustainable development. Data shows that sustainable investments can offer lower downside risk in comparison to traditional investments. According to fresh estimates by BlackRock, ESG investments could touch $1 trillion by 2030 despite pandemic slowdown.

Economists and experts feel ESG funds are already on track and may have a record year of inflows. According to BlackRock’s estimates, the first three months of 2021 saw an inflow of $21 billion in ESG funds. In 2020, the value was $51 billion; in 2019 it was $21.4 billion; and in 2018, it was just $5.4 billion.

Besides, experts feel ESG ratings or markings also have a positive or negative effect on the P/E of companies and will be a divisive factor in future.

According to an estimate by BNP Paribas Asset Management, in 2020 despite the pandemic outbreak, investors have been doubling down on managed sustainability funds and many are keen on building up assets in this segment for long-term returns. It has noted that ESG portfolios or sustainable funds have exhibited sharp outperformance across indexes like S&P 500 and MSCI equity index.   Deloitte also found that ESG-focussed assets could make up half of all professionally managed investments by 2025, which can be worth $35 trillion. 

Maybe it’s time for governments the world over to make ESG reporting a must for companies and ask them to draw a roadmap for ESG integration, processes and reporting.


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