ESG, or sustainable investing, stands for environmental, societal, and governance factors that help screen whether a company is sustainable and ethical. This set of factors is used by investors to evaluate a company’s business practices. And ESG investing is becoming increasingly popular, especially in the aftermath of COVID-19. According to the Harvard Business Review, “in the opening weeks of global bear markets following the spread of COVID-19, most ESG funds outperformed their benchmarks.” Clearly, ESG is no longer only for people who care about the environment. In fact, during the second quarter of 2020, ESG investing hit a record pace, totaling over $10.4 billion in investment dollars.
For a clearer picture of exactly which factors play into a company’s ESG rating, here’s a breakdown:
Environmental criteria that factor into a company’s environmental rating include:
Social criteria used to screen a company’s societal impact include:
Governance criteria cover a broad range of corporate activities including:
What ESG taught us during COVID-19
COVID-19 showed the world that companies who qualify as ESG, performed better during hardships. Sustainable companies showed much more resilience and had few losses during the pandemic. According to the New York Times, 64% of ESG funds beat their benchmarks versus 49% of traditional funds through the first week in August 2020. Studies show that ESG companies are better positioned for disaster. Why? They’re better at managing risk, have better performance, and are less liable for getting in trouble with environmental issues. On top of that, companies that treat their employees well retain top talent, decrease turnover, and thereby increase overall productivity and efficiency.
The trend of ESG investing is not limited to the U.S. market alone. Europe just released “the world’s greenest recovery package” providing grants and tax advantages to companies who invest in renewable energy, electric cars, charging stations, and retrofitting buildings. More and more companies are working to create a business model that articulates their purpose and values, and create workplace environments that walk the talk.
These companies are aligning sustainable initiatives with business strategy not only to differentiate from competitors, but also increase their bottom line.
If your desire is to give back and make an impact, ESG investing is worth looking into. Creating and maintaining wealth starts with focusing on what’s important to you so that you can build a plan to help others. For more on how to #GiveWealth, download our free 4-week challenge today to learn more.