Saving the world and profiting don’t often go in the same sentence but thanks to ESGs, ethically, they can.
ESG stands for Environmental, Social, and Governance. It’s a set of criteria that helps investors (you) know what kind goals a company sets to make support the environment, social issues, or an organization. This could mean a company has zero carbon emissions, prioritize biodiversity on their farms, commits to responsible waste and water management, hires racially and gender diverse staff, pays people fairly, or they don’t pay their CEO too much etc.
ESGs are touted for their capacity to make lasting change on a large scale and drive profit at the same time. ESGs are not charities. They’re are not one-time contributions but securities (investments), like stocks and bonds, that invest your money into their business which invests back into the world to make lasting change and bring you profit.
ESGs are essential for Gen Z because we see so many social issues and have become aware of them and feel so powerless against them. Coupled with financial dread, ESGs are a valuable way to target companies and force them into change as they combine corporate social responsibility with expected profit. ESGs are a valuable way to build wealth and make a difference so no wonder they’ve surged in popularity.
TL;DR: Only the best-behaved corporations get your money (which they need to grow their business and profit) but how do we know they’re doing what they say that they’re doing? And will they be around forever?
ESGs can be a great way to introduce Gen Z into investing because we’re often passionate voices online. What a great way to put our money where our mouth is.
Who Determines What an ESG is?
The thing about ESGs is because they’re so new, not everyone agrees on how to define one.
So far, MSCI, a financial firm that sells investments and provides portfolio analysis tools, is a major voice in measuring ESG investing initiatives. They’re involved in analyzing and establishing standards for ESG funds which helps prevent greenwashing and creates a standard for all companies to comply with.
So far, MSCI has published a ratings system that rates over 8,500 companies and gives them letter scores to rate their ESG initiative compliance. Ratings are based on a letter system where AAA is the highest, next coming AA, A, BBB, B, and CCC.
In developing these ratings, MSCI asks important questions like “Is the company aligned with any of the UN Sustainable Development Goals such as those tackling hunger, inequality, pollution and climate change?” among others.
While the system isn’t perfect, as this same system gives H&M, the second highest rating (AA) despite… allegations.
Identifying ESGs isn’t easy and we have a lot of work to do in standardizing benchmarks.
Are ESGs a trend or are they here to stay?
Truly, we really don’t know. But it does look like many companies may be preparing for the latter.
According to Bankrate:
- Global ESG fund assets reached about $2.5 trillion at the end of 2022, up from $2.24 trillion at the end of the third quarter, according to Morningstar.
- 88 percent of public companies have ESG initiatives in place, according to a December 2020 survey from NAVEX Global, a compliance software company.
- Just 13 percent of global investors see ESG as a “passing fad that will eventually go out of fashion,” according to Capital Group.
But check out this article by Harvard Business Review for some opposing opinions.
Why Gen Z Should Care?
Once again ESG’s are not a charity. You’re not making a one-time contributions and hoping your money is going to the right place. ESGs funds are investment tools aimed at growing your wealth while also placing corporate social responsibility at the forefront.
When you invest in a company, you give them money in exchange for partial ownership. Additionally, companies use this money to buy equipment, hire people, and invest in initiatives. At the ended of the year, that company files a 10-K detailing their financial performance. Because ESGs are typically purchased in funds, a bunch of super smart people read and analyze these detailed documents and recommend you, the investor, to invest or not.
Some have speculated that ESG investing may decrease reckless corporate social behavior such as oil spills or poor waste disposal practices because they directly go against the requirements to be called an ESG. These behaviors may affect corporate funding which has a direct impact on their earnings. Earnings combined with efforts from MSCI and defining specific criteria that increase credibility of an ESG, we can create long-term sustainability and change.
With ESGs, investors can align their investments with their values. Whether you’re committed to fighting climate change or fair and equitable hiring practices, you can find funds that match your beliefs.
How to Invest in ESGs
Check out this article by Investopedia to find out how to invest in ESGs.
Conclusion
In conclusion, ESGs are funds aimed improving environmental, social, governance issues. The main challenge of ESG investing is the lack of universal standards to prevent greenwashing and misrepresentation of the company’s goals.
However, as mentioned before, ESG investing is on the rise, and many experts do not believe it is just a financial fad. This means as demand for ESG investing increases, so will advocacy and practical guidelines.
