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The importance of ESG for Investors

The importance of ESG for Investors

Not such a long time ago, when investors looked at companies’ potential for long-term success. They mostly focused on the financial aspect, as financial stability has always been the bottom line. However, in recent years, a company’s ESG efforts have become an increasingly relevant factor for investors, and for more reasons than one. As ESG stands for environmental, social and corporate governance criteria. All of which have become highly significant in today’s business world. Investors are taking a deeper look into these criteria as a way of estimating whether the company is worth taking a chance on. In this article, we will further explore precisely why ESG holds such relevance for investors.

Break down all the most important aspects of ESG itself

ESG

The environmental factor

Although certain governments are still denying that global warming is a real thing, according to a report published by the Forum for Sustainable and Responsible Investing. “climate change remains the most significant overall environmental factor in terms of assets. Affecting $2.15 trillion in institutional investor assets – more than three times. The amounts affected in 2014.” The same report emphasizes that fossil fuel restrictions or divestment policies applied to $144 billion in institutional investor assets at the beginning of 2016. What is more, even shareholders are concerned about climate risk. Namely, they have filed 93 resolutions specifically on the subject in 2016. They have negotiated a number of commitments from the target companies to report on strategic planning around climate change or to reduce their greenhouse gas.

However, the question that still needs answering is – why should investors care about the environmental impact the companies they invest in make? Well, first of all, almost 60% of investors deem it important to invest in companies. These are dedicated to making the world better for the next generations.

Secondly, there is the old bottom line – the financial aspect. Christopher P. Skroupa points out that companies that have a sustainability-based approach are more profitable over time and deliver better returns. In other words – the company has a higher chance of success if they do business in an environmentally responsible manner and avoid such fiascos as the Volkswagen Scandal. Larger profits in the long term along with good environmental reputation are always a winning combination for investors.

The social factor

The second most important factor for investors should be the social one. This factor includes such issues as volunteer work, donations to charities, shared values. As well as treatment of employees in terms of fair wages, safe working conditions and good benefits. Again, these issues speak volumes of the kind of company an investor might potentially be dealing with. It’s a matter of public image and again sustainability, but in a different manner. We live in a world in which giving back to the community and treating your employees. Well is paramount to not only the company’s image, but their prospects for long-term success as well.

That’s why it would be wise for investors to turn to consulting companies that conduct thorough research and provide quality ESG reporting before considering being associated with a given company. Doing your due diligence before putting your money in a company simply makes good sense, for all reason stated above. You wouldn’t want to tarnish your image by investing in a company that holds values opposite to yours, or even worse, invest to only discover the abysmal working conditions. Again, there is the financial aspect – talented employees, especially millennials, are the driving force behind numerous successful companies, and you wouldn’t want to do business with a company that treats their talent with the ‘everyone is replaceable’ mantra.

The governance factor

The third, and possibly most important factor is by far the governance factor. This one includes such elements as financial transparency (or lack thereof), conflict of interests and even illegal behavior that includes a variety of activities. As well as usage of political connections or donations to gain preferential treatment. All of these elements, if negatively scored according to reports. Are red flags that as an investor, you need to run from a company such as this. Not only would associating with such a company permanently tarnish your reputation. But it could also involve you in a legal battle. Not to mention that your investment would be money thrown away.

Financial gain is important – you invest in order to benefit from it. However, the increasing importance of other elements of good business practices is not something that should be neglected. As you will benefit from looking into every factor, and could risk losing everything if you choose not to.

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