Over recent years, wealth and asset managers have seen a significant inﬂux of client funds ﬂow into sustainable investments. Across the globe, demand for sustainable investments has been driven strongly by an ever-increasing amount of people who prefer to invest in alignment with personal values.
There are a myriad of reasons to pursue ESG investng. The following is a non-exhaustve list of reasons behind why this innovative method of investing is gaining popularity across the globe:
This is a critically important dimension, when one looks at what companies can and arguably need to do towards the betterment of society. Take climate change for example, where corporations are in the position to innovate, such as creating and championing driverless electric transportation / other related aspects of green infrastructure, or committing on the price of carbon that transcends borders.
In short, public companies have a key role to play, and need to be encouraged to do so by investors who both choose to fund them, and make clear what they expect.
At minimum, companies need to understand that there is a financial penalty for getting environmental and social issues wrong and it helps as well if there is a reward for making smarter choices
The global momentum around responsible investment has partly been driven by concerns about the detrimental impact of short-termism and harmful corporate behaviours on company performance, investment returns and market behaviour. Short-termism and harmful corporate behaviours lead to negative consequences, harming growth and share price. These can include sector emissions constraints, community opposition to projects, increased insurance premiums, decreased access to capital markets, damage to reputation, and litigaton threats.
On the other hand, ethical corporations are committed to end unsustainable behaviours and tackle future challenges including environmental and social issues, thereby creating a good reputation which hands a number of advantages to a business. It is attractive to customers, draws in the best staff, and enhances trust with similarly ethical trading partners.
ESG investing does not equate to foregoing returns. In 2015, Index firm MSCI has found that share portfolios with more exposure to socially responsible companies, based on its own environmental, social and governance criteria, performed better than the benchmark overall over an eight-year period.
According to Prof. Ioannis Ioannou, an assistant professor from London Business School, sustainable companies tend to have a more dedicated investor base who trade less often, compared to less sustainable companies that attract more transient investors who trade more often. This implies that ESG investments have lower risk of excessive price volatility than their non-ESG peers – Good news for investors seeking stability in their investments.
People who choose to follow an ethical investment strategy let their feelings, about how workers should be treated, how the natural environment should be cared for, how corporations should treat their shareholders and so on, drive their investment decisions. One of the benefits of this style of investing, is the feeling of satisfaction you get when a company, whose actions you support, performs well financially, bringing good returns to your portolio, and benefits to all of its stakeholders and society as a whole.