With the growing wealth gap and disruptive social trends, investors are looking into equitable and sustainable ways to make money. At the same time, companies are paying attention to the impact of environmental, social, and governance (ESG) issues on customer decisions.
What is ESG?
Otherwise called impact investing or socially responsible investing, ESG prioritizes sustainability when making investment decisions. While the environmental aspect looks at a company’s conservation efforts, the social side examines how organizations treat employees, customers, suppliers, and local communities. On the other hand, governance considers the company’s day-to-day running.
Here’s a further breakdown of ESG considerations.
Investors look at how companies handle the following issues:
- Waste management
- Climate change
- Carbon emissions
- Water and air pollution
- Energy efficiency
- Water usage
This standard evaluates a company’s interactions with its stakeholders. Common issues include employee engagement, community relations, customer satisfaction, inclusivity, gender equality, and human rights.
As an investor, you want to put your money in companies with stable leadership structures. Organizations should also uphold integrity when selecting leaders–check the executives’ track records for claims of fraud, harassment, and discrimination. Besides fostering transparency, good governance encourages industry best practices while ensuring accountability among stakeholders.
Although the term “ESG” emerged from a 2004 UN study, this concept has existed for hundreds of years. For example, the Methodist movement advised its members to avoid investing in alcohol, gambling, and tobacco companies in the 1800s. According to the church’s founder John Wesley, it was wrong to profit at your neighbor’s expense.
Sharia law’s prohibition on weapons has also influenced Muslims’ choice of investments over the years. Another wave of ESG happened in the 1960s when investors boycotted anyone supporting the Vietnam War.
Despite rising interest in this form of investing, ESG remains a controversial issue. For starters, the absence of standardized rules makes it harder to gauge a company’s ESG impact. It’s not uncommon for organizations to overstate their climate contributions without addressing the real problem. Upon exiting DWS Group as the head of sustainability, Desiree Fixler exposed the organization’s misleading opinions on ESG investing. Although DWS was quick to deny any allegations of misconduct, Fixler claimed that players in the financial sector believe it’s safe to exaggerate ESG.
A section of Republican leaders, including Governor Ron DeSantis, have also described the ESG agenda as ideological. Republican lawmakers accuse investment managers like BlackRock of using their market control to promote liberal policies. Furthermore, politicians have condemned ESG for interfering with the free market. The GOP-controlled senate even voted against President Biden’s directive that allows ESG principles to govern retirement plans.
However, Republicans continue to overlook the average US worker in their efforts against ESG. Per a recent survey by JUST Capital, Americans are more concerned about fair living wages, job creation, employee health and safety, ethical leadership, and advancement opportunities.
Another issue is using past controversies to measure a company’s environmental, social, and governance efforts. Future ESG ratings can be inaccurate when based on an organization’s old patterns.
Looking Into the Future
Despite all the backlash on ESG, this investment approach is gaining popularity. If you want to earn money while making the world a better place, ESG investments may be an area of investment to explore.
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