Environmental, Social, and Governance (ESG) is an approach to sustainable investing that drives positive environmental, social, and corporate responsibility outcomes, alongside financial results.
ESG investing achieves this through consideration of the three ESG factors, along with taking any ethical considerations into account when making investment decisions.
These criteria assist in better determining the future financial performance on an investment, so as to better assess and manage risk and return.
The objective of ESG investing is the ability to generate sustainable, long-term returns from socially responsible investments (SRI).
The main difference between ESG investing and ethical investing is that the latter is essentially investing with the heart. In an ethical investment, a client may be happy to walk away and forfeit returns, so long as they were not aligning themselves with socially controversial activity. Examples of this may include tobacco, gambling, weapons and pornography.
ESG investing involves incorporating targeted ESG research on a company to determine it’s long term value.
This research will include investigation into the following three categories:
Environmental criteria such as a company’s energy use and impact on climate change, greenhouse gas emissions, waste, pollution, natural resource conservation and animal treatment
Social criteria such as a company’s relationships with its stakeholders including working conditions, impact on local communities, health and safety and employee relations and diversity
Governance deals with a company’s leadership, the proper use of accurate and transparent accounting methods, fair voting, avoiding conflicts of interest and not engaging in illegal behaviour
In other words, the ESG research will evaluate if the company is acting as a good corporate citizen.
Today the investment community uses ESG investing with the goal of ultimately driving better returns. ESG research can help to make better and more informed investment decisions by taking into account additional factors that might have been overlooked or potentially mispriced by the markets.
For example, if a business model relies on underpaid workers, weak regulation, under-price pollution, etc., those current earnings will not be sustainable over time and will not represent long term value.
The result of a successful ESG plan is to create an alignment of investment opportunities with investors’ values and investment opportunities.
For information on where your super is currently invested and your ESG investment options moving forward, contact the Superannuation Advice Australia team.