Securing purpose-driven investments that impact communities.
ESG is an investment approach that considers environmental, social and governance policies and utilises them to guide and examine how a business operates. This approach is crucial for investors who prioritise a company’s relationship with the environment, human communities, and management. Investors who consider ESGs want to align their investment portfolios with their values.
By considering ESG guidelines, you as the investor can make informed decisions mitigating risk and identifying opportunities (Forbes, 2022). The environmental factor is a criterion that considers a company’s impact on the environment. This includes a company’s position and approach towards climate change, pollution and waste. Social factors include a company’s labour practices and community impact and Governance factors consider how a company’s board and management positively drive change regarding executive compensation, board diversity and shareholder rights.
While ESG-leaning businesses provide an avenue for socially and environmentally conscious investors to align their business acumen with their values, their performance has been scrutinised and evaluated by investment firms such as JPMorgan Chase, Wells Fargo and Goldman Sachs (Investopedia, 2023). But what are some red flags to look out for as an investor contemplating ESGs?
Although ESG investing has gained popularity, there has been some criticism and backlash against its misapplication. The first big issue is ESG rankings. The critique surrounding ESG rankings is often that they are not well understood amongst investors. This confusion often means investors aren’t able to compare the ESG performance of different companies (Harvard Business Review, 2022). Additionally, Bloomberg (2021) suggests that ESG ratings don’t measure a company’s impact on the planet and society but rather calculate the world’s impact on the company and its shareholders. This is a serious claim as it suggests that part of ESG investing is rooted in greenwashing. This awareness of ESG discrepancies has presented a need for thoughtful positioning and investing.
Authentic and Purposeful ESG Investing
Points to ponder as you consider investing.
Authentic and purposeful ESG investing is key to ensuring that investors are making a genuinely positive impact while also achieving their financial goals. For there to be meaningful investments and for ESG to effect positive change, investors should consider the following:
Study the game: Before investing in a company that claims to be ESG-compliant, investors must research the company’s performance and ensure that it is committed to executing its ESG objectives. This can involve looking at ESG ratings, and company reports, speaking with the company’s management, and examining its policies and practices.
- Screen the business: Using positive and negative screening to establish or expand your fund/portfolio as an investor is an important approach to consider. For example, in negative screening, you may want to exclude fossil fuel companies from your portfolio if your goal is to see a decrease in pollution. And, in positive screening, you may want to include companies with the lowest carbon footprint.
- Engage in the company you invest in: Shareholder Action is where investors encourage the companies they invest in to pursue material ESG opportunities.
- Influence the company from the inside: To fully inspire integration, Active investing is when an investor buys equity in a company to change how it operates, influencing it to pursue ESG prospects.
- Invest in the index: Similar to positive screening, Sustainability-themed investing is where investors identify a sustainability issue and invest in indexes of companies that address it directly.
Take Your ESG Investing To The Next Level
Access the below must-have resources.
If you’re interested in ESG investing, here are three free tools you should know about:
- MSCI ESG Ratings and Climate Search Tool: With MSCI, investors can compare company climate objectives across its extensive database. This platform also enables investors to view ESG risks and opportunities.
- S&P Global ESG Screen: With this tool, investors can access ESG data on over 9, 200 businesses on the site. Companies are scored and ranked using S&P’s Corporate Sustainability Assessment (CSA) industry-specific questionnaire.
- Sustainalytics: This global ESG rating tool offers vast databases, including the Sustainalytics Corporate Ratings Database, Environmental Performance Database, and Social Performance Database.
The Future of Impact Investors and ESG Investing
A bright and promising conclusion
In conclusion, the outlook for ESG investing is bright, with continued growth in demand and assets under management. Investors who want to align with companies that share their values should take advantage of ESG investing. To ensure that businesses are committed to their ESG practices, investors can encourage transparency and engage all stakeholders on the importance of observing positive changes in governance and practice. Investing in companies that prioritise conscious trading allows investors to generate significant financial returns and champion positive environmental and social change. ESG investing is about making a difference while also profiting from a growing market trend that reflects a more responsible and sustainable future.
References
https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
https://www.forbes.com/advisor/investing/esg-investing/
https://thedecisionlab.com/insights/finance/esg-for-everyone-how-to-improve-retail-esg-investing
https://online.hbs.edu/blog/post/esg-investment-strategies
https://theimpactinvestor.com/best-esg-analysis-tools/
Media contacts
Mark van Wyk, Co-Managing Partner
Morné Edas, Co-Managing Partner
About Infra Impact
Infra Impact Investment Managers Proprietary Limited (“Infra Impact”) is a specialised infrastructure and impact investment management business, based in Cape Town, South Africa. Infra Impact manages the Infra Impact Mid-Market Infrastructure Fund 1, a dedicated, closed-ended third party investment fund that makes equity and mezzanine investments primarily in the water, waste, green energy, telecommunications infrastructure and related sectors. Infra Impact Investment Managers Proprietary Limited is an authorised Financial Services Provider (FSP 872).