The past few years have shifted the views of consumers and companies into a greener approach. Investments now adhere to the same standards as the “green economy” becomes a more prominent aspect of daily life. No wonder Environmental, Social, and Corporate Governance, referred to as ESG, is becoming a household name in the business world.
More in-depth information about what is ESG investing is available through top banks and other financial institutions, where you can also submit your application.
ESG Investing: What Is It?
ESG is an investment that utilizes your funds to support sustainability.
A corporation has strong ESG if it does well in one or more of these three areas. As a result, these companies frequently obtain excellent ESG ratings from independent companies like Refinitiv.
What then motivates businesses, big and small, to support social and environmental development? The primary motivator is the conviction that doing so would produce favorable financial results and long-term advantages for the planet. ESG investing is becoming synonymous with sustainability for socially aware retail investors who hope for a profitable outcome in the long run.
Financial literature and research have repeatedly demonstrated that investing in an ESG company produces higher investment returns. Is this an accurate statement?
The MSCI World ESG Leaders Index is one of the most well-known indices that track the financial performance of strong ESG companies globally. In the last one, three, and five years, ESG returns have consistently outperformed the conventional MSCI large-cap index compared to this ESG index.
Why do stock prices typically perform better for companies with higher ESG scores? Three factors exist:
- Proven ability in research and development
High-tech businesses with cutting-edge technologies tend to have excellent ESG scores. The world’s largest software company, Microsoft, promotes the idea of a paperless office using online collaboration capabilities. As a well-known e-commerce platform and technology corporation, Amazon encourages the growth of digitalization.
- Stricter rules and rewards for social responsibility
The Chinese government has released several plans and regulations in Mainland China that support the growth of ESG, such as the carbon neutrality target by 2060. Furthermore, by establishing a “green transition” mandate, the government has actively promoted the growth of clean-energy businesses.
The Biden administration in the USA has suggested creating a 100 percent clean energy economy to reach net zero emissions by 2050. Investing $2 trillion in green sectors (renewable energy and electric vehicles) over the next four years and lowering the nation’s dependency on fossil fuels are two strategies to achieve this aim.
- Ignoring ESG issues weakens a company’s ability to withstand unfavorable market developments.
Companies that support environmental preservation or social progress enjoy significant investor goodwill and exhibit stronger resilience to unfavorable market developments. On the other hand, businesses that don’t typically react to adverse economic shocks are worse.
How do you get in on the ESG investing trend?
Many index providers are announcing ESG indexes to provide references on the potential and demand for the stocks.
So now that you are familiar with the fundamentals of ESG investing, learn more about what is ESG investing and get started with it through top financial institutions like DBS.