What do your clients need to know about ESG investing?
Unpack the crucial aspects of ESG investing and how it can enhance your advisory offering to clients.
Summary
ESG investing evaluates companies based on Environmental, Social, and Governance factors to assess their sustainability and ethical impact.
In 2024, ESG investment trends emphasize credibility, with increased scrutiny to prevent greenwashing.
ESG investing may have lower short-term profitability but often provides long-term stability and risk management.
ESG investing can attract a diverse client base, enhance reputation, and improve long-term financial performance for businesses.
What is ESG investing?
ESG investing, or Environmental, Social, and Governance investing, is an approach that considers these three factors when making investment decisions. ESG factors are used to evaluate the sustainability and ethical impact of an investment in a company or business.
Environmental criteria examine how a company performs as a steward of nature, including its efforts to combat climate change, manage waste, and utilize natural resources.
Social criteria examine how the company manages relationships with employees, suppliers, customers, and communities, addressing issues like human rights, labor standards, and social justice.
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
ESG investments integrate these criteria into the investment process. This can be done through various strategies such as negative screening (excluding companies that do not meet certain ESG standards), positive screening (actively selecting companies that perform well on ESG criteria), or ESG integration (incorporating ESG factors into traditional financial analysis).
Why is ESG investing important?
ESG investing is important because it aligns investments with broader societal values and goals. It allows investors to support companies working towards sustainable and ethical practices.
ESG investing can also drive companies to improve their practices. As more investors prioritize ESG criteria, companies may feel compelled to adopt more sustainable and ethical operations, leading to systemic changes in industries and economies alike.
What are the current trends in ESG investing in 2024?
In 2024, ESG investment trends are evolving in several ways. There is a heightened focus on the credibility of sustainability targets due to increased scrutiny over greenwashing, with investors demanding more transparency and accuracy in ESG claims. Companies also prioritize comprehensive ESG reporting and due diligence, driven by stricter regulatory frameworks like the EU’s European Sustainability Reporting Standards (ESRS).
Managing Scope 3 emissions, which include indirect emissions from a company's value chain (like those from suppliers and product use), is becoming crucial as these can account for up to 90% of a company’s total carbon footprint and are challenging to control. Investment in renewable energy, including solar, wind, and hydrogen, continues to grow, while advancements in AI and circularity are improving data analysis and reducing waste.
Is ESG investing profitable?
ESG investing can be profitable, but it’s essential to approach it with realistic expectations. While some highly-rated ESG companies may have lower short-term profitability due to the costs of implementing sustainable practices, they often exhibit greater resilience and long-term stability.
These companies tend to manage risks better and have stronger governance, which can contribute to sustainable financial performance over time. Generally, the costs associated with high ESG standards can result in lower immediate returns compared to companies with less stringent ESG practices.
What are the pros and cons of ESG investing?
These are the pros and cons of ESG investments:
Pros
Positive impact: ESG investing allows investors to align their portfolios with their values and support companies committed to environmental and social responsibility.
Risk mitigation: ESG investment can help mitigate long-term risks associated with environmental, social, and governance issues, potentially leading to more stable returns.
Market opportunities: Companies with strong ESG practices may present attractive investment opportunities, as they can be better positioned for long-term success and innovation.
Regulatory advantages: Investing in ESG can prepare investors for future regulatory changes and reporting requirements, reducing the risk of non-compliance.
Cons
Limited options: The ESG investment universe might be narrower compared to traditional investments, potentially leading to fewer choices and reduced diversification.
Performance variability: The financial performance of ESG investments can be inconsistent, with some not meeting the expected return benchmarks.
Greenwashing risks: Investors may face the risk of greenwashing, where companies exaggerate their ESG credentials, making it challenging to identify genuinely sustainable investments.
Data challenges: Obtaining reliable and standardized ESG data can be difficult, complicating the assessment and comparison of ESG performance across different investments.
What should you be asking your clients that are interested in ESG investing?
When discussing ESG investing with clients, it’s crucial to understand their motivations, values, and goals. Here are five questions you should ask:
What are your primary motivations for ESG investing?
Which ESG factors (environmental, social, or governance) are most important to you?
What is your risk tolerance concerning ESG investments?
How do you measure the success of your investments?
Do you want to include or exclude any specific industries or companies from your portfolio?
These questions will help tailor ESG investment strategies to your clients’ values and financial objectives and ensure that their investments align with their broader goals.
How can ESG investments help grow your business?
ESG investment can significantly enhance your business by attracting a broader and more diverse client base. As interest in sustainable and ethical investing grows, offering ESG options can differentiate your services and appeal to socially conscious investors. This can lead to increased client satisfaction and loyalty, as clients appreciate the alignment of their investments with their personal values.
Integrating ESG investments can position your firm as a forward-thinking and responsible business. It demonstrates a commitment to sustainable and ethical practices, which can enhance your firm’s reputation and attract positive attention from stakeholders. ESG investment can also lead to better long-term financial performance, reducing risks and contributing to stable, sustainable growth for your business.
Want to work with Unbiased?
As ESG investing continues to evolve, understanding these trends and implications is crucial for making informed investment decisions. By aligning with sustainability goals and ethical practices, investors and firms can benefit from enhanced long-term stability and growth. Staying updated on ESG investment trends ensures that investment strategies remain relevant and effective in a rapidly changing market.
Ready to connect with clients interested in ESG investing? Let Unbiased Pro deliver clients straight to your inbox and enhance your advisory services today.
Content writer
Kate has written for leading publications and blue chip companies over the last 20 years.