In recent years, there has been an uptick in ESG investing, especially amongst hedge funds. While data indicates that ESG-focused investment funds tend to underperform neutral funds, more investors are pushing toward ESG investing. This begs the question, what is ESG investing, and why are companies so keen on it?
ESG investing means investing money into companies whose policies are geared towards environmental, social, and governance sustainability policies. These companies focus on green energy use, a more inclusive and diverse workforce, and pay structures prioritizing everyone, not just the CEO and senior-level executives.
As mentioned above, neutral funds and even non-ESG investment funds have, in the past, outperformed ESG funds. Interestingly more funds are choosing to go the ESG way. While there may seem counterintuitive, there is a rational reason behind it.
When investing, the long-term always wins over short-term speculation. In this context, ESG funds may not outperform now, but the future favors them. To understand why, here are some key factors why investors are racing towards ESG investing.
Fossil fuels have no future
The world as it is today has been built on fossil fuels. This has been reflected in the significant weight that oil companies have carried in the S&P 500 and other indexes globally for decades. However, the world is turning, and there is a growing awareness that fossil fuels are no longer tenable due to climate change.
This means more capital is flowing into companies that are developing innovations that can save the world. While such innovative companies are primarily in the startup stages, they will continue to grow as the world shifts away from fossil fuel-based production.
Signals of the future are already evident in companies like Tesla. A few years ago, Tesla was a small non-descript company. Today, it is one of the world’s largest corporations and stands tall above all the legacy car makers in market capitalization.
As the Teslas of other industries emerge, the odds are that they will rise to the top of their respective markets. For this reason, investors betting on the next 10 – 15 years are smart to be shifting towards ESG investing.
Diversity and Equality Build Brand Equity
The world has come a long way with a dark history of discrimination based on color, gender, and sexuality, among other issues. Over time, society has recognized that this discrimination is counterproductive and denies the economy a chance to benefit from the ingenuity and hard work of everyone.
That’s why companies are tapping into the talents of women, people of color, and other minorities to make the most of their talents. Besides, people are increasingly frowning upon anyone with a discriminative mindset. So, the more progressive a company is, the better for its brand image and actual productivity.
Employee Morale And Productivity
It has been a trend for decades for a company CEO to earn multiple times more than the average employee. However, society is pushing back against this, with the rising demand for a narrower gap between CEO and average employee pay.
From an investor perspective, this is good because it means employees will likely be better compensated and more motivated to give their best. This then translates to better profits and overall company value.
Conclusion
ESG investing entails investing in companies whose policies are geared towards environmental, social, and governance sustainability. While ESG indices are not the best performing at the moment, they have much potential going into the future. The world is turning away from fossil fuels and increasingly demanding equal pay and representation from organizations.
