The use of Environmental, Social and Governance (ESG) metrics by the financial sector is growing through ESG investing. To understand the growth, it is helpful to consider what motivates their use.
ESG investing can be divided into two camps. There are those who view ESG investing as an ethical choice, believing that investing in companies with strong ESG practices is worth the risk of financial underperformance. Ethically driven investors want to align their investments with their personal or group (such as religious or demographic) values. These investors are interested in companies that are making a positive impact on the environmental, social or governance issues that are important to them, often viewing financial results as a secondary benefit.
In contrast, there are those who view ESG as a tool for predicting future financial value, choosing to invest in companies not because strong ESG scores reflect company dedication to corporate ethics, but because they are accurate indicators of long-term company value. This group is primarily concerned with maximizing returns, minimizing (or adequately managing) ESG risk, and taking advantage of ESG opportunities. They believe that companies with strong ESG practices are better managed and have a competitive advantage over their peers. They also believe that companies with poor ESG practices are likely to face legal, regulatory, and reputational risks that can adversely impact their financial performance. According to Robert G. Eccles, tenured Harvard Business School professor, now at Oxford University, in his articles in Forbes entitled, ESG Is Not About Ethical Standards And Ethical Values, “[ESG] is simply about companies and investors managing material risk factors to ensure long-term value creation.” Eccles believes that the use of ESG should be limited to this purpose, and not used as an ethical barometer, stating that, while there may be broad agreement on some ethical values, opinions differ on others.
In reality, the benefits of ESG investing can be both ethical and financial. Companies that prioritize ESG can have a more sustainable business model and a better reputation, which can lead to improved financial performance over time. For example, companies that have strong ESG practices are more likely to have robust governance structures, which can help reduce risks and prevent potential financial scandals. Additionally, companies that prioritize ESG are likely to have a more engaged and motivated workforce, which can lead to higher levels of productivity and efficiency.
ESG investing is not just following a trend or making a political statement. It is a balancing of financial and ethical considerations in order to create long-term value. By integrating ESG into decision-making processes, companies and investors can ensure that their investments are sustainable and responsible, leading to improved financial performance over time. As Eccles states, it is not just a left-wing initiative, but rather a mainstream investment strategy. ESG can serve as an effective tool for both the ethics and the performance camps.
To learn more about how ESG can benefit your investment strategy or your company, reach out to Clear Strategy Co. today.
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