More Investors are applying these non-financial factors as part of their research process to identify material risks and opportunities. Let’s look at three reasons why it is a good time to invest in the ESG theme.
ESG today is a global trend
As we can see, the world is moving towards sustainable investing. ESG factors are no longer just another niche option, rather it is becoming a crucial part of the investing process. Surveys say Europe represents almost half of the current $30.7 trillion of assets in sustainability funds. Increasing and stringent laws related to ESG considerations, millennials rooting for purposeful investments, protecting the environment are some factors.
Businesses are integrating ESG to maintain sustainability, as non-compliant companies are getting punished by all shareholders. Reports also suggest that ESG metrics are better at forecasting a business’s future earnings potential instead of traditional measures. They also help companies to safeguard themselves from ESG related crisis that can result in regulatory disasters.
Flows into ESG focused sectors/companies are rapidly increasing. ESG bound companies tend to enjoy improved efficiency, better business figures, as well as low cost of capital. This grassroot of interest is also resulting in the arrival of ESG based business opportunities like renewable energy technologies, electric vehicles, clean tech etc. With these changing dynamics, one can expect ESG investing to become a key part of every portfolio going forward.
ESG can optimize financial returns
Focusing on ESG doesn’t mean one has to sacrifice financial returns – instead, it can generate gains for both individual investors and the society overall. Though past performance is no guarantee of future results, historically ESG investing has rewarded investors over the long term and generated higher risk-adjusted returns. In 7 out of 9 instances, Nifty 100 ESG TRI outperformed Nifty 100 TRI. More importantly, there is a certain consistency of returns.
ESG helps to avoid drawbacks
ESG can also help limit exposure to downside risks, such as a company’s hidden liabilities or issues that can lead to problems and value erosion. Investments in responsible companies significantly remove the downside risk. The ESG structure helps to avoid risky companies, identify sustainable companies, and improve return prospects.
The threat of climatic changes and the depletion of resources has grown, so investors may choose to consider such issues into their investment choices. The issues often represent externalities, such as influences on the functioning and revenues of the company that are not exclusively affected by market mechanisms.