Sustainability has become a prime concern in today’s world. Owing to this, companies are coming forward with new ways to improve sustainability and contribute to organizations that strive to solve social and environmental issues. Sustainable investing encourages investors to invest in such companies.
Under sustainable investing, there are various frameworks, such as socially responsible investing, economic, social, and governance investing, and impact investing. Of these frameworks, we can take a closer look at economic, social, and governance investing, also known as ESG.
To answer the question of what is ESG investing, we need to understand the goal of sustainable investing. Sustainable investing means investing in companies and organizations that work towards solving environmental and social issues. Under sustainable investment, the investors look for an opportunity to invest responsibly, generating a good return. To achieve it, the investors evaluate companies based on environmental, social, and governance factors.
Know more about ESG investing and how it works
ESG investing is popular among investors who seek to contribute toward sustainability while generating income. There are a lot of companies that seek to make a positive impact on sustainability; however, not all succeed in contributing toward sustainability. Finding a good company to invest in is essential. Investors determine which company to invest in based on the following factors:
The letter E in ESG stands for the Environment. A key factor in determining whether to invest in the company or not is analyzing how eco-friendly the company is. It means that all factors that affect the environment, such as waste management, carbon emissions, toxic wastes, noise pollution, use of chemicals, etc., are analyzed.
Human rights, race, gender, etc., are all social factors. Investors try to gather information regarding whether the company has violated human rights, the work environment, gender discrimination in the workplace, and whether the acts of the company follow labor law.
Governance deals with the management of the company. The management is the key decision-maker of the company and is responsible for making sure the tax code is in compliance with the rules, maintaining proper financial records and presenting before the shareholders, and conveying the state of affairs to the shareholders. If the management fails to do any of these, the company will have to face legal consequences.
Analyzing these factors will allow investors to make informed decisions on whether to invest in the company or not. In other words, these factors act as a tool to measure the company’s contribution toward sustainability. If a company operates and fulfils all the requirements, it is a good company to invest in.
How can you have proper ESG investing?
ESG investing can be quite difficult if you are just getting started. Like any investment, there are a lot of risks that you must be wary of while you invest. Moreover, there is a problem in analyzing whether the company checks all the requirements for ESG investing. To avoid all these hurdles, you can always approach investment managers and invest through them. For a small fee, they will make sure that your money is invested in the right company. They will also make sure that the company fulfils environmental, social, and governance criteria.
Food scarcity, depletion of natural resources, racial discrimination, climate change, and other social and environmental issues are still looming on the world and slowing down economic growth. Due to this, many companies have come forward to try and make a change in the world.
With ESG investing gaining prominence, such companies are getting sufficient financial support to invest more in solving these social and environmental issues.