ESG Investing is on the Rise as Investors Realize Good Environmental Practices are a Good Proxy for Strong Management and Higher Profits

By Si Jun Lee

According to August 2017 reports by Bank of America, “ESG” investing has grown by more than 97% globally in the past 20 years. ESG investing refers to the practice of using environmental, social, and governance criteria to screen and select companies for investment. Environmental criteria consider how a company manages its environmental resources and responsibilities; social criteria look at the company’s impacts in the communities where it does business; and governance criteria examine a company’s corporate structure and transparency.

While ESG investing was traditionally viewed as a niche investment strategy for the socially-conscious crowd, more mainstream investors are coming to the realization that strong ESG performance is an indicator of strong and effective management. CEOs that act responsibly in managing environmental impacts also approach other factors in their business in a more sustainable way, which means their business are more profitable over the long-term and deliver better returns to their investors. A 2014 study by the firm CDP found that companies that plan for environmental changes achieves return-on-investment (ROI) that is 18% higher than companies that do not plan for environmental change, and 67% higher ROI than companies that refuse to disclose their emissions.
BofA estimates that the amount of assets managed under ESG funds have gone from less than $100 billion in 1995 to $8.72 trillion in 2016, and women and Millennials investors are the two primary groups driving the sharp increase. A recent survey by Nielsen indicates that 90% of Millennials and 80% of women investors show an interest in ESG strategies, and are willing to pay extra for sustainable offerings.

Increased interest in ESG strategies has not gone unnoticed by corporate boards. Most global companies now issue Corporate Responsibility reports. Many mid-size companies are also starting to incorporate ESG considerations, to some extent, in their business planning.

But despite the progress, there are still significant barriers to ESG investing. One is the lack of uniform and comparable ESG reporting data. While many companies offer Corporate Responsibility reports, they often cover different issues and rely on different metrics. If the growth in ESG investing continues on the same trajectory, however, it is likely that the marketplace will adapt to develop more uniform and reliable standards as companies compete for a bigger share of ESG investment dollars.

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