When we invest in companies, we do so for prospective returns. After all, investing is an effective way to put your money to work and potentially build wealth by allowing your money to outpace inflation. It would logically follow that we would want to invest in companies that do well in the financial markets and our primary concern is capital growth. Over the long term, the earnings power of a business drives its stock price, and so if we invest in a company that does well, its stocks will probably increase in value, and so would our capital gains.
But where is your money going? A company's stock price reflects investor perception of its ability to earn and grow its profits in the future. If shareholders are happy and the company is doing well, as reflected by its share price, its executives are likely to keep their jobs and receive increases in compensation. Do you truly understand the company you are supporting? Your money is far more than its face value - it’s a representation of your faith in the work your company is doing.
And while you could be primarily focused on maximizing your financial health, do you care about whether women have equal representation on the board? Whether the company manages the social impact of its operations on the local communities? Is the harm the causes by the company greater than the societal benefits it produces? Does the company compliant with regulatory compliances and transparent to its stakeholders?
So how do you infuse your personal values and beliefs into your investing decisions?
Enter ESG
ESG investing involves investing in companies based on evaluating their policy performance in Environment, Social, and Governance criteria. Instead of looking at profits objectively, we look at their work to address climate change, diversity ratio, impact on different socio-economic communities, transparency, and other factors before making socially responsible investments. ESG is an umbrella term that refers to the due diligence done to obtain specific data that investors consider when they scrutinize the externalities (side effects/consequences of a company’s commercial actions) generated by the companies they plan to invest in. The reason such investing is crucial is that it reallocates wealth to those companies that are better for society as a whole and also pushes other companies to rework their procedures and frameworks.
Credit: DBS Bank
Technically, the practice of socially responsible investing began to be addressed around the 1960s, when investors excluded stocks or even entire industries from their portfolios based on business activities such as involvement in the South African apartheid regime. This soon grew to encompass other aspects such as environmental pollution and equality and became called ESG. Large companies created ESG funds that only invest in companies that score well on the required criteria and most environment conferences since (like the Geneva Conference) have a subset that focuses on ESG. But these conferences are attended by high net-wealth individuals and others who already care about the environment. What about you and me? What are we doing to make socially responsible investments?
We are living among grave environmental and sustainability challenges such as climate change and inequality. It is therefore imperative we live in a way that tackles these issues – including holding businesses accountable for their actions and supporting those that seek to create a better world. The pressure for more sustainable investing that we read about in the news, like the German “green raids” and the environmental activism is led to by the woke culture regarding these topics that are growing in our generation. Time and time again, the youth demonstrate their concern for the environment and the planet. In fact, in a study done on Millennials, 83% of consumers want brands to align with their values.
ESG investing gives us the chance we need to hold corporations accountable. The latest commitments from business leaders to “do well by doing good” have centered on supporting workers, responding to racial injustice, and fighting climate change. We have the power in our roles as consumers, employees, and investors to hold them to these commitments and demand more.
We are beginning to see consumers take up the cause, as they now expect companies to take a stand on social and environmental issues. And companies respond. Following the success of Burger King’s Impossible Whopper, which features a vegan patty with a tenth of beef’s carbon footprint, McDonald’s announced its own “McPlant” burger this past fall. In January, General Motors pledged to sell only zero-emission vehicles by 2035. United Airlines has committed to reducing 100% of its greenhouse gas emissions by 2050. These are consumer companies that increasingly rely on matching the values of their customers to survive.
Employees are making similar demands. Tech companies are seeing workers organizing, with early unionization pushes at Amazon and Alphabet. This follows employee protests and walkouts in recent years against sexual harassment, migrant detention, and discrimination. Companies seeking to attract, motivate, and retain top talent need to understand what that talent values. For younger generations, that is often work with a deeper purpose than just profit.
Investors have some of the greatest power to hold companies accountable, especially as ESG investing has grown in popularity. Despite delivering impressive financial performance, the CEO of Rio Tinto was forced out by shareholders in the fall after the public discovered the mining company had destroyed an ancient aboriginal site in Australia.
So next time you are thinking about investing some of your money, dig deeper, and ask yourself, is this truly a company I want to support by investing my resources in?
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