Ethical investment is all about Environment, Social and Governance (ESG); which has been entered in our lives as a responsible or conscious investing. Conscious means investing that does not have a negative impact on the environment and society. Companies are evaluated not only by financial performance, but also by the degree of impact on the Earth's ecology and social environment.
It is believed that an investor chooses ESG because he thinks about how to help the planet. Millennials, who have grown up in a "welfare society", are the most loyal to ESG investments. For them, concern for the climate, safe production, and human equality has come to the fore. In this context, ESG investments are more likely to be a change in the investment paradigm itself, and not just a trend that will someday pass. Green investments are with us forever.
Greening of Businesses
In order to be good in terms of "ethical" criteria, companies must declare:
- Combating Climate Change: For example, to reduce harmful emissions or switch to sewing clothes from recycled materials.
- Positive Impact on Society: These relate to the issue of gender equality in the distribution of positions, poverty eradication, working conditions, health care.
- Transparency of Management: Bribes, corruption, tax strategy, again gender composition of the board of directors, donations, remuneration of top managers.
Criteria to Evaluate Businesses by ESG Factors
The most popular ratings that evaluate businesses by ESG factors are:
- CDP Climate Water & Forest Soccer. It takes into account the criteria for combating climate change, pollution of water bodies, and deforestation.
- Sustainable Analytics ESG Risk Ratings. Measures companies' exposure to ESG risks.
They rank companies in terms of corporate and social responsibility.
It should be noted that regulators have not yet finally decided on the criteria for assessing the degree of "greening" of companies. Often these ratings even contradict each other. Even more often, companies themselves take advantage of the vagueness of the wording and begin to actively use non-financial reporting exclusively for marketing purposes, which subsequently leads to investor disappointment.
Therefore, the advice is to look for answers to the ESG of enterprises in their open financial statements in case of difficulties. Social and corporate responsibility is reflected in many cases.
ESG Tools
Western companies are actively involved in developing ESG tools. For example, there is a growing number of ETFs that invest only in companies with a good ESG rating. Their investment memoranda prohibit them from investing in shares in arms manufacturers, the tobacco sector and nuclear energy companies. Although for the investors, the topic of ESG is still new. Full access to ESG funds is available to investors only through an expert broker or advisor. There are more than 600 of them in the United States.
The most successful are:
- Innovator IBD Breakout Opportunities ETF – 12.48% return
- First Trust Global Wind Energy ETF – 12,15% return
- Global X Yield Co & Renewable Energy Income ETF – 10,49% return
Green bonds are issued exclusively to finance environmental projects. In 2020, the new issue of green securities exceeded $200 billion. On the New York Exchange in the ESG sector: national projects and Green Bonds have gain popularity.
ESG for Investment
It is expected that in the next 2-3 years, ESG ETF offerings are likely to appear at every management company. As society immerses itself in the "green" topic, the demand from investors will also increase. ESG investments will attract more and more capital, which means that their rate will grow simply due to the "fashion" for ethics, which is unlikely to pass in the near future. If an investor is heading for the distant future, investing in the ESG sector will be a good and sustainable solution for him in the long term.
ESG investments are known to becoming promising to provide high return. However, expert advises are always required as one way or another, any investment instrument carries market risks. Therefore, the main principle of the investment strategy remains portfolio diversification, even if you really want to help the planet.
