The simple answer is, ‘yes’. According to Bank of America, ESG funds will grow in leaps and bounds in the next 20 years. Analyst are expecting a $20 trillion of asset growth, which will be at par with S&P 500’s value.
ESG represents an opportunity for all of us who want to save this planet and wish to have a sustainable future. We can’t have a sustainable future alone. A good way to do it is to invest in companies who give importance to environmental, social, and governance factors.
What is ESG investment?
ESG stands for Environmental, Social, and Governance investing. Responsible investing strategies are applied to achieve financial returns and address global issues, known as sustainable or ethical investing.
The 3 core components of ESG are environment, social, and governance.
(i) Environment – Takes into account how a company is handling environment-related issues. Are they using green technologies to lower energy consumption? Are they using renewable energy?
(ii) Social – Deals with the company’s relationship with employees and its competitors.
(iii) Governance – Primarily focuses on the financial and investment strategies of a company.
Why is ESG the next big opportunity?
Studies have shown that ethical investing can trigger good investment returns and lower portfolio risks. Most importantly, ESG can make investors feel proud of the stocks they have in their kitty.
Ethical investors avoid investing in companies that increase pollution and harm society. These investors want to invest money in companies that engage in sustainable practices to bring a positive impact on the environment. Such companies are good investment opportunities as they help people to make money without compromising their morals. It’s like making money without harming our mother nature.
ESG has low-risk factors and gives long-term returns to investors in the form of dividends. Businesses that understand virtues like low carbon footprints are likely to be less affected by commodity prices. Considering the volatility of fossil fuels and oil, fresh investments in renewable energy can pay dividends and minimize risk.
In 2018, the annual growth rate of ESG funds was 17.4%. They went up to $12 trillion from $8.7 trillion in 2018. Microsoft, Alphabet Inc, and Johnson and Johnson have proved that investors are gradually shifting toward ESG. Microsoft received a AAA rating from MSCI due to its excellent governance and usage of innovative clean technologies to bring carbon emissions below zero by 2030.
According to a 2018 survey on ESG investments, 87% of high-profile millennial investors have expressed interest in ethical investments. Around 17% of millennials want to invest money in companies that use sustainable and socially impactful business models.
Millennials are the practical lot. They want to reduce credit card debt, invest in companies where their personal values are reflected and social values are maintained. A report released by Morgan Stanley suggests that around 84% of millennials invest money with ESG in mind. Additionally, MSCI’s report states that 90% of millennials are inclined toward socially responsible investments. These factors are likely to push ESG investments to $20 trillion.
The past few years have been terrific for ESG investments. An increased number of ESG vehicles were accessible to investors and a huge amount of assets flowed to ESG funds. Hopefully, the investment market will realize the importance of ESG soon, and give a good rating to companies focusing on sustainable practices. The stock price will be higher than the companies engaged in bad ESG practices.
Thus, ESG is not only the next big opportunity to get good returns on investments but also a great chance to do something for Mother Earth. People can provide financial support to companies taking care of global concerns.
Twenty years back, ESG investments were not considered a lucrative investment opportunity as they didn’t give good financial returns in comparison to oil and tobacco companies. Fortunately, the situation has changed now. ESG has become a big trend in the investment arena. Many companies are analyzing the environmental and social impact of their products.
Previously, both investors and companies were concerned about making money. Now, they are thinking about the ethical part of investments too. They want to take steps to bring positive environmental and social changes. After all, if this planet is destroyed, then what will people do with the money they have saved?
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