ESG Investing: Prioritizing Sustainability in a Capitalist Structure

Environmental, social, and governance, or ESG, investing by businesses has been rapidly accelerating in recent years. So, what is ESG, why is it important, and why is it growing in popularity?

Fig. 1. Increase in global ESG investment since Q1 2018. Image source: https://www.reuters.com/article/us-global-funds-sustainable-idUSKBN29X2NM

What is ESG?

ESG, also commonly referred to as sustainable or impact investing, is a set of criteria that investors use to evaluate the operations of a company based on socially conscious factors. Environmental factors look at how a company works to be sustainable and combat climate change. Criteria may include greenhouse gas emissions, energy consumption, waste management, treatment of animals, conservation of natural resources, and pollution.

Social factors evaluate the company’s business and community relationships. Social criteria include prioritizing workplace health and safety, high labor standards, giving back to the community through donations or volunteer work, and working with other businesses that share the company’s values.

Governance has to do with a company’s leadership, auditing, internal controls, and stakeholder rights. For example, governance criteria include the transparency of accounting methods, voting rights for shareholders, and potential conflicts of interest among board members. Investors prioritize their values to determine which of these factors are the most important to them, as it is unlikely that a company will perform equally in every category.

Why ESG Matters

ESG is important because it demands accountability for corporations while helping investors determine and avoid potential risks. In regard to accountability, corporations are the main drivers of climate change through their high greenhouse gas emissions. In fact, a 2017 report by CDP found that only 100 companies are responsible for 71% of global emissions since 1988, proving that in order to combat and mitigate the effects of climate change, the responsibility falls on businesses.

By prioritizing ESG criteria in investments, change can actually be made on a large-scale basis instead of pegging the blame on individual consumers. In addition to simply being good for the world, ESG makes for smart investments through risk avoidance. Although the picture is complex, evidence indicates that investments with lower ESG risk are financially beneficial for investors. By prioritizing ESG criteria, investors can make sound financial decisions while avoiding companies whose practices could create risks, such as oil spills or scandals.

ESG has been on the rise in recent years largely due to cultural shifts, and an increased demand in social values since COVID-19. Culturally, younger investors have higher expectations of companies and demand prioritization of sustainability and equity, and there are also more women investors who tend to value investing in companies that provide solutions to environmental and social issues. Moreover, the pandemic served as a wakeup call to many by reinforcing the importance of ESG investing, largely due to its social aspects. COVID-19 revealed the intersectional nature of ESG, as the environmental, social, and governance factors are reliant on one another and, when properly executed, create a synergy that is more powerful than any individual factor on its own.

It is undeniable that the investing world is heading in the direction of ESG at a rapid pace. However, we need to be seeing more drastic changes now. The climate is not waiting for us to get our act together. It is up to us to become more ambitious, and change begins where the power lies: with corporations. ESG cannot be a trend but rather must become a foundational part of investing. We are heading on the right track, and the rise of ESG brings hope that sustainability and capitalism do not have to be enemies.

How We Can Help

LifeCity can help support companies in developing ESG strategies. Check out our website for more information on how your organization can develop an Impact Management System.