How to invest ethically and sustainably has long been discussed by companies and investors. The answer to this question is to carry out ESG investment. ESG investing allows companies and investors to make their investments with consideration of the environment and human well-being. It has had significant expansions in recent years and has raised companies’ awareness of managing and reducing their environmental impact in innovative ways.
What is ESG investing?
ESG investing is often referred to investing with prioritising optimal ESG (Environmental, Social and Governance) factors. It is an effective way to encourage the company’s investment with consideration of environmentally friendly factors and human beings. It is worth noting that ESG investing requires the assumption that a company’s performance is closely tied to these environmental and social factors.
To encourage ESG investing, brokerage, mutual fund firms and companies begin to introduce exchange-traded funds (ETFs) with other products that follow the ESG investing strategy. ETFs can be bought and sold multiple times a day and offer low expense ratios. An investor can invest without restrictions on the number of times a day. The low expense ratios mean less of the investor’s investment will be given over to the administration cost, in other words, an investor can spend less on managing the funds. These features make it popular in the ESG investing market.
Current ESG investing trend
According to the ESG Global study conducted by Harvard Law School Forum on Corporate
Governance, there is consistent growth in the adoption of ESG investing. In 2021, there were about 26% of global investors said that ESG is central to their investment approach and in 2022, the percentage has increased to 34%. Europe is always in the leading position of ESG charge with 93% of ESG users. The growing ESG investing trend highlighted the significance of ESG investing among companies and stockholders.
Referring to GCV (Growing Capital Ventures), there is also a growing appetite for ESG investing in the UK. Recorded data shows that last year there were 2 billion pounds of investment raised by the impact tech start-ups (early-stage companies aiming to build solutions to sustainable development goals). This is a dramatic increase compared to investment in 2018 (almost 1.2 times higher). The rapid increase has not only revealed people’s emphasis on delivering positive social impact but also implied the growing potential returns from ESG investment. Referring to PNB Paribas’s report, there has been a 14.1% compound annual growth rate in returns from ESG investing in the UK, which is 1.1% higher than the world standard benchmark.
Pros of ESG investing
Regardless of the growing popularity of ESG investing, it is important to have a formal discussion about the advantages of having this investment. A constant argument proposed by the opponents is that ESG investing is relatively new to the investment market, and no one can guarantee its profitability. However, a recent paper by Morgan Stanley Institute for Sustainable Investing has proved that there is no financial disadvantage in investing ESG funds. In fact, in the future, it may provide an even higher profit than investing in traditional funds.
Given the fact that businesses and companies have started to pay more attention to ESG-
related matters, making investments in environmentally and socially conscious companies can not only create social value but also positively affect the international corporate environment to allow the production of goods and services to be served more to humanity. ESG investing helps investors evaluate investments with potential strong returns and build their long-term wealth.
Moreover, investors can receive better returns and decide their long-run investment by building a portfolio. When building a portfolio, they will be involved in four stages: identify what you want to do and your priorities, what are your approaches towards your target, add funds and stocks to your portfolio and then screen them to find the final funds or stocks that should be used. Investors will constantly be making investments if they see the portfolio have positive social effects. However, as a result, some newly issued stocks may attract less attention since investors will need to find suitable stocks that could fit into their portfolios.
Cons of ESG investing
While providing investors with lots of benefits, ESG investing also has several drawbacks. Since ESG investing is a relatively new way to invest and there are still many uncertainties existing, a high expense ratio is expected, this means that each year a very high percentage of the fund’s total asset will be used to cover expenses. But people may generally be keen on paying a high premium to keep the value of their funds.
Furthermore, given that the governance of ESG investing is loose and there are no clear standards for ESG, each company needs to manage their own ESG reporting. As a result, certain information about ESG investing may not be reliable and investors may make their decisions based on incorrect information which may then lead to failed investments.
Should we carry out ESG investment?
From the above evaluations of the pros and cons, in my opinion, although there are certain problems existing, given the many benefits ESG investing offers, it is worth it to carry out ESG investment. However, ESG investing can be considered by some opponents as a non-priority today due to the current stigma caused by greenwashing. Greenwashing is referred to a situation when an organisation or a company conveys a false impression to consumers about the positive environmental impact their products do. This harms investors a lot when they try to find genuine environmentally friendly companies using misleading information. A higher premium will go to these companies since people believe their products are green. This will then lead consumers to overpay. Greenwashing will affect investors’ confidence and may act as a key barrier to ESG investing. To encourage more ESG investment, the government needs to take immediate action. One example of such action is guidelines about how to differentiate real green products from greenwashed, provided by the US Federal Trade Commission (FTC).
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