ESG stands for Environmental, Social, and Governance, which are three increasingly vital areas of focus for ensuring the sustainability of our planet. A circular economy focuses on society-wide benefits, reducing waste by transitioning to renewable energy sources, ethical farming and the ability to reuse, repair or recycle as much as possible. By investing in ESG, money can be funnelled into businesses that are working in a positive way to benefit the world.
Impact of investing
Choosing to invest in a company or business used to be nothing more than a financial risk, one that would either see you make or lose money. But that has gradually changed and nowadays, investors are also considering the bigger impact of their investments. That could be the impact the company has on the environment or the society in which it is based. Individuals are assessing the potential carbon footprint of a company, along with its potential for profit.
Increasing numbers of people are reluctant to invest in oil and mining companies because of the damage they do to the planet, while airlines and meat production are out of favour with some for the scale of their carbon footprint. The likelihood of a company experiencing a data breach, an accounting scandal or lack of transparency with investors are all factors that fall under the ESG banner.
As we become more aware of our impact on the world around us and how quickly time could be running out for the effects of climate change to be seen, looking at ESG helps determine the risk and return of long-term financial gains from a company.
Improving economic growth
ESG is not just a vital factor in socially responsible investing. It’s now thought to be one of the best assessments of just how much financial risk a company is potentially exposed to.
‘Sin’ stocks that include alcohol, tobacco, weapons and gambling have always had a dark side, but they are progressively being shunned by investors keen to protect and heal the planet and society with ethical alternatives. Clean energy, healthcare innovation, artificial intelligence, water and improved infrastructure are areas that investors are keen to support.
The ticking timebomb of climate change has generated mounting pressure from activists telling us it’s now time to escape the make-use-dispose mantra to become a circular economy that reuses as much as possible. This, in turn, will create ESG innovation and improve economic growth.
Where to invest?
Investments that have a positive impact on our planet are not always easy to spot because there are so many factors to take into consideration.
For investors with a social conscience, who find it difficult to choose individual companies to invest in, a fund might be a suitable option. Ethical funds are on the rise, some adapted to specific areas of sustainability such as electric vehicles, nutrition or digitally-focused services. Some ethical funds include the BlackRock BGF Nutrition Fund, Impax Environmental Markets Trust and the ASI UK Responsible Equity Fund.
Tailoring your investments to include ethical equities is not impossible. It’s also a wise way of thinking for the long-term investor because it goes hand-in-hand with the premise that your investments should be able to withstand the test of time. ESG investing could be one way to ensure long-term financial gains for the patient and shrewd investor.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.