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ESG or Environment, Social, and Governance represents three criteria that are increasingly changing the way people invest. The concept began in the 1960s, but it has recently gained more prominence with a focus on concerns about the environment, social causes, and corporate governance in the media and in day-to-day life.

The concern for ESG can be reflected in purchasing decisions, from the preference for organic food, cars with low to zero carbon emissions, and companies with fair trade practices. Younger investors are turning toward ESG as a guide, with 67% of millennials stating that investments are a means to express "social, political and environmental value" compared to 37% of baby boomers, according to a U.S. Trust Survey.

The Changing Landscape of Investment

It is clear that this type of investing is not just a fad, but will become an essential component in investing. The growing concern about environmental sustainability is not simply a sentiment expressed by reformers but is an important part of government policy, with many countries making commitments to slash emissions and passing legislation making these resolutions law.

The growing anxiety of environmental calamity, validated by scientific research has caused businesses and investors to question the value of growth for its own sake and to measure profitability and expansion in the context of sustainability. The lack of viable resources created by global climate change and the displacement of people will not only be distressing on a human scale but will threaten the bottom line of corporations. ESG-oriented investing is not just humane, but it is becoming an essential consideration.

The 3 Components of ESG  Investing

ESG stands for Environment, Social, and Governance. The following is a description of how these concepts are applied in ESG investing.

Environmental

An investor may analyze a company based on how sustainable its policies are. Does it manufacture products that leave a large carbon footprint? If so, what is the company doing, if anything, to mitigate this problem? What actions has the company taken to implement green technologies in its manufacturing or in the running of its offices and deliveries? Does it promote environmentally friendly products with organic ingredients and recycled materials?  How vocal is the brand about environmental causes and climate change?

Social

An investor may ask about the social consciousness of a company before investing. They may investigate its relationship with business partners and manufacturers and ensure the company engages in fair trade practices. An investor may inquire whether the company sources its products from sweatshops that use child labor if they pay their employees a fair wage and ensure regular inspections and plants and working spaces. Someone may be more likely to invest in a company that gives its employees quality health insurance, generous maternity leave, or affordable training and education.

Governance

Investors may expect companies to be transparent in their operations. They may be reluctant to invest money in companies that are known for corrupt practices, for attempting to bribe regulators, or being quick to issue NDAs and engage in settlements to avoid bad press or even prosecution. It is also worth noting if a company treats its shareholders fairly and if stakeholders are given sufficient opportunities to vote on issues that affect them and the public.

The Long-Term Value of ESG Investing

The conventional wisdom was that viewing with an eye to the environment, social causes and corporate honesty would yield lower returns than traditional investing. However, this idea is not wisdom and is becoming less conventional. Increasingly, ESG will be the ethos of investing for millennials and beyond. According to the U.S. SIF Foundation, ESG investing grew 38% between 2016 and 2018 from $8.7 trillion assets to $12 trillion.

Investing by definition is focused on the future. ESG is a forward-looking way of investing that will yield significant returns, as the environment, social issues, and corporate governance become more prominent in guiding investment decisions. 

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