The Motley Fool

ESG investing for financial return

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A Beyond Meat sausage charcuterie board
Image: Beyond Meat

Environmental, social, and governance investing has become more popular in recent years. Many ESG investors are motivated by ethical and policy concerns. But I have been wondering: even if I am not an environmentalist, could ESG investing be good for my financial returns?

ESG credentials as a business booster

I think one point some financially driven investors overlook is that a strong ESG story doesn’t necessarily just add costs for a company. It could actually boost profits.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

An interesting example is companies such as Oatly and Beyond Meat, which have emphasised their provision of alternatives to dairy products. There is a large and growing market of customers who want such products. Often they are willing to pay a premium for them. So while Oatly may have an ESG story, it’s the financial impact of that which attracts me.

FTSE 100 company and ESG investing

I think the same logic holds for the consumer goods company Unilever. It loudly trumpets its environmental policies, from ethically sourcing palm oil to helping smallholder farmers run their businesses. But for a consumer facing company such as Unilever, I think such moves are good business practice. It can tout its environmental credentials to shoppers and use them to support the premium pricing of its brands. It can also secure its supply chain.

ESG fund inclusion

With more money pouring into ESG investing, that means that ESG funds will likely continue to attract more funds. Indeed, so many funds now tout ESG credentials that the Financial Conduct Authority today announced a clampdown on how such funds are marketed.

With ever more money chasing a tightly defined set of companies, the law of supply and demand could kick in. Companies which are in the FTSE 100 index benefit from higher share demand because tracker funds needs to buy them. I think the same could be true of companies that market themselves as suitable for ESG investment. More demand in the market could help boost their share price.

ESG investing and progressive management

Another possible attraction to ESG investing is that a company’s ESG performance is a proxy for how forward-looking its management is. If management engages on social and governance issues, this argument goes, that could help assure accountability and financial performance.

The evidence for this is mixed, however. For example, a European academic study concluded that ESG performance did not necessarily correlate to share price performance.

Nonetheless, I continue to see some merit in focussing on companies which genuinely value corporate governance, for example. That could lead to more robust corporate decision-making processes. But that also points up a risk I see in ESG investing. A poorly run company could potentially seek to distract attention from that. It could shift investors’ focus to non-financial reporting measures such as environmental standards.

So while I consider a company’s ESG profile, as an investor my primary focus remains on how profitable I expect a company to be in future. I am hunting for companies where I perceive ESG investing and improved financial returns come together.

Our 5 Top Shares for the New “Green Industrial Revolution"

It was released in November 2020, and make no mistake:

It’s happening.

The UK Government’s 10-point plan for a new “Green Industrial Revolution.”

PriceWaterhouse Coopers believes this trend will cost £400billion…

…That’s just here in Britain over the next 10 years.

Worldwide, the Green Industrial Revolution could be worth TRILLIONS.

It’s why I’m urging all investors to read this special presentation carefully, and learn how you can uncover the 5 companies that we believe are poised to profit from this gargantuan trend ahead!

Access this special "Green Industrial Revolution" presentation now

Christopher Ruane owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Beyond Meat, Inc. The Motley Fool UK has recommended Unilever. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.