Across the world, investors are increasingly seeking to fund organizations, ideas, and products that comply with rigorous commitments to positive change. ESG investing is the practice of funding businesses that can prove their impact on environmental, social, and governance issues.
Previously referred to as a trend, today ESG investing is imperative for business leaders and strategists. In fact, in 2020 sustainable fund assets were worth $1.7 trillion. While ESG investing presents opportunities for modern organizations to evolve, it also presents challenges.
Download the Guide: Investing in ESG: The Guide the ESG Investing & Why it Matters
On the one hand, ESG investing supports solutions to major issues through business initiatives. For leaders, this represents an opportunity to expand their impact and legacy to create meaningful change.
On the other hand, responding to ESG investing trends requires change management.
The good news is organizations with a strong ESG track record are more likely to perform better in the long run: 46% of traditional funds survived the last 10 years compared to 77% of ESG funds.
That makes the case for ESG investing as not just a moral imperative, but also good business sense for any organization with plans for growth.
This guide to ESG investing will help leaders navigate the current landscape, understand investor motivations, and evaluate strategic options to attract ESG investors to their business.
What is ESG Investing?
ESG investing is the act of funding businesses that positively impact the environment, support their many stakeholders, and demonstrate ethical leadership and governance practices.
ESG investing counts on measurable performance across environmental, social, and governance initiatives. At first glance, each of the three themes within ESG may seem as if it can stand on its own. However, each component is interdependent on the others to deliver on the holistic set of values required by ESG investors.
ESG Investing: Environmental
The environmental portion of ESG investing measures how business activities impact the planet. Examples include the following types of activities:
- Implementing policies that mitigate climate impacts, greenhouse gas emissions, and carbon consumption.
- Creating renewable products or technology that support efficient resource use.
- Developing water conservation programs.
- Creating supply chain and resource efficiencies.
- Incentivizing employees to use public transportation, cycle, or carpool to work.
- Transitioning to renewable energy sources.
- Contracting with third parties that commit to reducing their climate change impact.
ESG Investing: Social
The social aspect of ESG investing examines how businesses interact with their complete network of stakeholders: employees, clients, suppliers, consumers, and the communities impacted by their work.
Social impact is also a focus of many companies. This means that a company operates in a way that inspires positive changes in society. An example would be a company that supports women’s empowerment by choosing to partner with suppliers that are female owned or operated.
Evaluations for the social portion of ESG investing may look at:
- How employees are compensated compared to industry benchmarks.
- Employee engagement, development, and turnover outcomes.
- Employee treatment and satisfaction.
- Whether employee and supplier safety policies are in place to prevent harm, injury, discrimination, or harassment.
- Diversity, equity, and inclusion (DEI) practices in hiring, developing, and promoting talent.
- Customer service ratings.
- Whether an organization has taken a public stance or dedicated resources to social justice issues.
- Contracting with third parties that commit to supporting social justice issues.
ESG Investing: Governance
The governance component of ESG investing looks at the performance and ethics of boards and leadership teams, including:
- Enforcement of policies that govern ethical business practices
- Board structure, voting, and nomination rules
- Weeding out conflicts of interest in leadership positions
- Improving diversity in boards and executive teams
- How executive compensation supports successful long-term outcomes
- Contracting with third parties that commit to strict, transparent governance practices
While they’re not precisely the same, ESG investing is sometimes associated with:
These other types of investing share similar goals, but each follows different philosophies. As a result, these terms aren’t necessarily interchangeable with one another.
How Does ESG Investing Work?
Those who wish to invest in ESG funds and stocks will seek out information about ESG performance. Some investors complete this research on their own. Others may work with advisors who provide recommendations on organizations or funds that align with the investor’s requirements.
Corporate ESG Reporting
The most accessible approach to understanding a company’s ESG performance is to read its corporate ESG report.
Depending on the jurisdiction, ESG reporting is mostly voluntary at this time. However, the organizations that commit to ESG are likely already doing this. These reports demonstrate how ESG initiatives are progressing over time. They outline the local, national, and/or global standards they adhere to, and in what measures they’ve achieved compliance, are on the path to compliance, or fell short.
Highlighting partnerships with social and environmental causes is common, as well as reporting on employee satisfaction, development, and retention figures.
The reports take on a combination of corporate storytelling, which typically includes a vision, mission, and letter from the CEO — plus performance measures and data to back up the narrative.
The best corporate ESG reports will be highly readable and accessible to a wide variety of audiences. The aim should be to make it as easy as possible for potential ESG investors to locate the report.
Scores, Ratings, and Accreditations
The challenge with designing and implementing ESG initiatives can include where to focus efforts and how to structure them. Earning scores, ratings, and accreditations from ESG regulators lend credibility to organizations that implement ESG initiatives and provide frameworks and standards to guide the process.
CDP is one such regulator by which a company can measure their ESG standards.
Media Coverage and Social Media
In 2020, ESG media coverage grew 75%.
ESG investors tend to stay current with investment media coverage, including what’s happening in social media conversations.
Prioritizing marketing and PR efforts around ESG initiatives will help to drive visibility to organizational commitments and outcomes, and call in the support of ESG investors.
Once a thorough research process is complete, investors will select their ESG funds. ESG funds are curated groupings of stocks that adhere to minimum inclusion standards. ESG investors should seek funds and stocks that align with their values.
Socially Conscious Investing
Some investors will perform “negative screening” as part of their investment strategy. This is an exclusion process for organizations that don’t perform well on ESG standards, otherwise referred to as socially conscious investing.
If ESG funds include one or more businesses that fail the negative screening test, investors may look for other ESG investment opportunities.
The socially-conscious approach accounts for $30.7 trillion in global investments today.
Download the Guide: Investing in ESG: The Guide the ESG Investing & Why it Matters
Why Invest in ESG?
Investing in ESG is both a moral choice and a sound financial strategy.
Conventional investment advice includes diversifying one’s stock portfolio to reduce the risk of losing value. It’s unlikely investors will put their money into funds and stocks that don’t increase in value over time.
Today’s ESG investors don’t have to sacrifice financial gains for their beliefs. Businesses that prioritize ESG initiatives are more likely to outperform their peers:
- ESG investing is proven to reduce risk and deliver gainful returns that are competitive with non-ESG portfolios.
- Among the S&P 500, companies that ranked in the top 20% for ESG grew 25% over their counterparts at the bottom of the ESG rankings.
Why is ESG Investing Important?
The significance of ESG investing continues growing as a result of changes to society, the environment, and the business world in the last few decades. From the COVID-19 pandemic to racial and gender equity movements, investors are cognizant of how businesses thrive — or suffer — under changing conditions.
ESG investing is more relevant than ever due to consumer-driven, voter-driven, and regulatory factors.
- Environmental reasons:
- Social reasons:
- 73% of executives agree the business community must do their part to support social justice issues.
- 54% of American consumers require brands to establish commitments about equality issues.
- The US Securities and Exchange Commission now requires public companies to report about employee development, retention, satisfaction, and diversity performance.
- Governance reasons:
- In 2019, women held 19% and people of color held 10.4% of board positions at Russell 3000 companies.
- In response to consumer demand, leading organizations are connecting DEI accountability with executive compensation.
- There are increasing numbers of shareholder lawsuits alleging material failures to prevent discriminatory employee hiring and promotion practices, conflicts of interest, and other governance issues.
Preparing for ESG compliance — given the possibility of future regulation — is an important long-term consideration as well. While there are no globally-enforceable jurisdictions for ESG standards today, this may soon change.
For example, the EU Non-Financial Reporting Directive provides a suggested framework for large organizations to report on climate impact — paving the way for possible regulations in the EU and elsewhere.
How Can Organizations Attract Investors with ESG?
Investors face overwhelm when it comes to the number of available choices for their funds. Organizations should make it simple for ESG investors to find them and learn about their ESG initiatives.
- Create a plan. Determine which ESG issues are most important to the business, its stakeholders, and the broader public. Businesses that commit to ESG issues aligned with the bottom line see stronger financial results versus prioritizing unrelated issues.
- Assemble dedicated ESG staff. The most effective way to deliver on ESG initiatives is to dedicate headcount to their design and implementation. It may be possible to realign some existing job descriptions to fit this need. In most cases, the scope of ESG work is too large to operate without dedicated headcount.
- Get executive buy-in. While most employees today prefer to work for companies with ESG programs, these efforts will stop short without the support of its leaders. Sharing resources around the long-term growth and success rates of ESG companies can help.
- Drive visibility with ESG reporting, marketing, and PR. Attract ESG investors by making it effortless for them to learn about ESG initiatives. Annual reporting combined with consistent marketing and PR efforts will improve awareness and drive inbound interest.
- Strive for continuous improvement. ESG investors are likely to keep tabs on performance over time. As part of an ESG plan, creating a culture of growth, curiosity, and continuous improvement will support growth and long-term objectives.
ESG Investing Trends
62% of consumers say businesses need to operate more sustainably than they are today. 71% of Americans want to see companies addressing social justice issues. And businesses with top-performing governance practices weathered the volatility of 2020 better than their peers.
While ESG investing is here to stay, here are some current trends likely to impact its long-term trajectory.
Environmental Investing Trends
Pressure from consumers, political cooperatives such as the Paris Agreement, and policymakers will continue to drive up participation in environmental investing worldwide.
ESG thought leaders and oversight bodies are calling for more voluntary disclosures about climate metrics, such as carbon expenditures and carbon prices.
Evaluating climate risks, such as the impacts of extreme weather events and climate refugees, will call for new types of scenario analyses. Investors will want to know how businesses plan to manage the impacts of climate-related events, including disruptions to supply chains, climate-related boycotts, and evolving consumer preferences.
Social Investing Trends
The COVID-19 pandemic put a microscope on existing social inequities — and consumers are taking note. 50% of consumers research brands online to learn their stance about social justice issues.
Most brands today have started to take a stance, but the repercussions of “not walking the talk” — for example, failing to follow through internally on external commitments — are harsh. Share prices can fall when news stories emerge about a business that violates its own stated values around social issues.
The key to attracting and retaining social justice-motivated investors is investing in the business for change, donating to front-line organizations, and accepting fault when missteps (inevitably) happen.
Governance Investing Trends
Board and executive team diversity will continue to drive ESG investments. An organization’s capacity to take action on climate and social justice initiatives — and implement strategies that are adaptable to drastic changes — largely comes down to the makeup of leadership teams.
Organizations with high-performing DEI programs are 45% more likely to improve their market share. Those in the bottom 20% are less likely to achieve higher profitability targets.
Committing to diversifying leadership teams and executive boards will help to align business priorities with ESG objectives and attract ESG investors over the long term.
Conclusion: Attracting ESG Investors is a Winning Strategy
As investors take more and more interest in the environmental, social, and governance impacts of their portfolios, organizations that center ESG are positioning themselves for long-term success. Scoring high on ESG measures represents an opportunity to attract investors and perform effectively amid dynamic conditions.
While the complexity of ESG can be daunting, OneTrust can help organizations create efficient, centralized workflows with ease.
The OneTrust ESG Platform supports organizational ESG initiatives by:
- Tracking ESG data across frameworks for seamless delivery to leadership teams.
- Helping to manage internal and third-party ESG risk across with automated flags, measures, and benchmarks.
- Providing up-to-date research and embedded expertise on the latest ESG regulations, guidance, and trends.
The OneTrust ESG Platform is trusted by leading organizations that have succeeded in operationalizing their ESG values. Find out how your organization can benefit from our solution by requesting a demo today.
- Download the Guide: Investing in ESG: The Guide the ESG Investing & Why it Matters
- Read the blog: Voluntary ESG Reporting — What Are the Benefits?
- Watch the webinar: Key Steps to Building a Successful ESG & Sustainability Program