Many companies have considered adopting ESG strategies because they believe the world is changing. Besides, some investors feel obligated to support companies with good environmental and social policies. In this article, we will briefly explain what ESG investing is and the benefits of investing in an ESG strategy as a company.
What is ESG Investing?
ESG is an abbreviation for Environmental, Social, and Governance within a business setup. The term came into the limelight in 2004 after the UN published a report called “Who Cares Wins.”
ESG ensures companies’ products and services are produced sustainably. Companies with good ESG programs perform business practices strictly in compliance with the Triple Bottom Line, which is people, planet, and profit.
In simple terms, ESG investing is a sustainable approach that investors consider to ensure the companies they invest in strictly operate within the required environmental, social, and governance practices.
What is the benefit of ESG investing?
Incorporating the ESG framework in your business operations can provide the following five primary benefits;
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Attract and Retain Investors
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Many investors conscious of the global environmental problem are taking the necessary steps to determine if the companies they invest in are helping the environment and people. As such, more companies are developing better ESG plans to attract investors.
Climate change has been a severe global problem that has necessitated the rise of ESG dealing with climate resilience as an essential asset to many investors. According to a survey by Morningstar, 80% of 500 asset owner fiduciaries believe that ESG programs are vital to their investment process.
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Establish Brand Trust & Transparency
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When companies issue accurate disclosure data on their ESG performance, they can demonstrate their fidelity to sustainability and ethical business operations. Buyers, staff, and business partners valuing sustainability will use ESG data to make informed choices on the kind of businesses they wish to work for or support.
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Identify and Manage Risks Efficiently
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Potential risks affecting business practices include physical damages, supply chain challenges, regulatory framework, and employee well-being.
In the last decade, claims related to environmental damages such as wildfires and floods have increased, leading insurance providers to cancel renewals of existing policies. In that case, ESG investing can provide a better solution for identifying and managing business risks.
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Lower Operational Costs & Better Returns
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To many investors, a company’s operational budget is a significant factor when selecting businesses to invest their money. As a result, organizations with sustainable operations are more cost-effective in the long run since they do not require substantial advertising budgets to increase sales or buy expensive items for their top management.
Investors who avoid businesses with poor business practices can invest their funds in companies that are sustainable in their dealings. Consequently, their investments will likely succeed and get higher returns during the investment disposal time.
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Market Outperformance
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Organizations with sustainable business operations generally outperform their opponents in the long run because they have a better reputation, more profits, increased market share, and sustainable revenue growth mechanisms. Their profits are reinvested in the business, thus generating more income for their investors.
Investors care much about the future, and good corporate governance indicates that the company will likely be sustainable in the long run. This can attract potential investors to the business because the corporate structure aligns with the investors’ goals.
ESG Triple Bottom Benefits
A good ESG strategy benefits the environment, society, and governance. Here is how:
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Environmental Benefits
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Environmental concerns have become a critical global problem. ESG practices can bring dual benefits that reduce a company’s operational costs while addressing environmental issues. Apple, for instance, has committed to using 100% renewable energy. This commitment has seen the company save over $80 million annually while conserving the environment.
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Social Benefits
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Besides caring about the communities, many investors also invest in companies dealing with issues close to the investor’s hearts. For example, if you have a company focused on improving access to clean water in poor communities, you are likely to attract investors committed to the exact cause.
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Governance Benefits
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A good governance structure is critical in ESG investing. Investors seek a robust corporate structure before investing their money in companies. Through good governance, businesses can make good returns to their investors due to sound company leadership.
Leading fund providers such as the California Public Employees’ Retirement System (CalPERS) and BlackRock have publicly announced that they value company exposure to environmental and corporate social responsibility, thus hoping many companies will catch up on these aspects.
Conclusion
ESG strategies have been a significant consideration for many companies because more investors want to invest in businesses with efficient ESG programs. Such companies are deemed to outperform their competitors in the long run because they are preferred destinations for most investors conscious of global challenges, including the environment and socio-economic issues.
