In our recent post on impact investing, we talked about how skepticism about Environmental, Social, and Governance investments (ESGs) will in the coming year be replaced by a better understanding of how beneficial they can be.
ESG investing in 2021 is expected to gain a great deal of traction. It represents a holistic approach to sustainability that allows companies to maintain a competitive advantage over the long term while creating value and supporting social responsibility initiatives.
ESGs are generally regarded as investment methodologies that embrace sustainability factors to help identify companies with superior business models. ESG funds consist of equities and or bonds into which ESG factors have been integrated. The bonds and equities in ESG funds pass stringent tests as to how sustainable the company (or government) is regarding ESG criteria.
ESG investing differs from other investment strategies like socially responsible investing (SRI), shareholder activism, conscious capitalism, and impact investing. SRI investing, for instance, screens out investments that don’t reflect certain values. Investors who participate in shareholder activism do it to encourage less desirable companies to improve their practices. Conscious capitalism focuses on creating value for all stakeholders, not just shareholders. And in impact investing, investors put their money in companies that have a positive social and environmental impact in addition to their healthy financial returns.
ESG investors, on the other hand, actively opt into one or more companies because of the impressive ESG attributes they’ve demonstrated. An ESG strategy is more flexible than many of the other models, particularly when it comes to investing in what are commonly called “sin stocks” like tobacco, alcohol, weapons, and gambling.
Seen as an integrated approach to sustainability with respect to disruptive change and financial strength, ESG investing is rooted in the belief that companies are more likely to succeed when they create value for all their stakeholders and not just the company owners. This resonates with the values of BCorp organizations, which UBQ Materials is proud to be. Research increasingly shows ESG-based investing reduces investment risk, generates competitive returns, and helps investors feel good about the stocks they own. Experts agree ESG investing makes sound investment sense as responsible companies are more likely to exhibit a greater level of resilience and outperform their peers or competitors.
If, as some argue, ESG investing came of age in 2020, ESG investing trends for 2021 indicate even greater interest in the investment approach. Some of that interest has been driven by the current pandemic, with investors turning their focus to how companies approach social risks like supply chain working conditions and human capital management. Employees, too, have gotten more vocal about what they expect from the organizations they work for and are pressuring their employers to adopt more sustainability practices.
Also look for increased efforts by regulators to encourage organizations to report on their climate risk exposure. Countries like the U.K. have already declared their intention to make disclosures aligned with the TCFD, or Task Force on Climate-related Financial Disclosures, mandatory across the economy by 2025.
As we head into 2021, expectations are focused on the broader environmental and social risks and opportunities companies face, and new sectors are likely to move to the forefront of ESG investing. As a global leader in combining purpose and profit to help achieve a truly circular economy and as a developer of groundbreaking innovation that reverses climate change, UBQ believes ESG investing will be a significant contributor to a better world where diversity, inclusiveness, and sustainability thrive. Despite the challenges the world faced in 2020, it’s an exciting time for all who care about making a positive impact.