ESG stands for environmental, social, and (fair) governance; here are some of the components:
Consumers are becoming increasingly aware of the environmental and social impact of corporations. They want to support corporations that make a positive impact in the world.
Beyond moral and environmental reasons, many believe that ESG practice is necessary for business sustainability. In this era, companies are susceptible to reputational risk: they can no longer run and hide from mistakes made.
Increasingly, consumers want to invest in companies that share their values and make a positive difference in the world.
According to the US SIF Foundation’s 2018 Report on US Sustainable, Responsible and Impact Investing Trends, as of year-end 2017, more than one out of every four dollars under professional management in the United States—$12.0 trillion or more—was invested according to SRI strategies.
ESG tends to be especially important to Millennials. This younger generation is driving the growth of the ‘green bond’.
Additionally, now that we have long track records and data, it’s evident that ESG-related investments demonstrate equal or better risk-adjusted performance than their traditional counterparts.
Across all sectors, ESG investments achieve financial returns that are on-par or better than their traditional counterparts.
Furthermore, companies with sustainability practices demonstrate better operational performance, have more predictable cost structures (a lower volatility) and suffer less reputational risk.
Some common measurements:
To learn more, the United Nations’ 17 Sustainable Development Goals (SDGs) is a good source to review.