Investors are looking into social global investing, its how-tos, as well as its benefits, we’re here to dig deep into what it can bring forward. Learn what social global investing (ESG) is, how it is measured, how it affects the stock market, and how you make your investments ESG compliant.
What is social global investing?
Social global investing or ESG, is short for Environmental, Social, and Corporate Governance. ESG aims to ensure that a corporate governance will consider the environment and social impacts of their investments. These include employee welfare, social equality; as well as the finance aspect of the business – where stocks, shares, bonds, and assets are directed to; as well as the governance planning – how the business aligns their values to help others and think as a whole, rather than an individual entity.
Introduced by an article written by James S. Coleman in 1988 – ESG is the idea of investing as collective growth rather than for self-interest. During the past decades many more discussions about the topic arose. From racial inequality to climate change, many more companies are looking into the effects of their investments. Since then, social consciousness in investing has been talked about, discussed, and applied.
That said, ESG is not a type of investment nor a type of a return. ESG is a measurement to ensure that environmental and social impacts are considered and embedded into investments made either by corporate entities or individual investors. At the same time, it’s good to know that there is no specific scoring system to measure ESG.
How ESG is tallied in
Different companies have their own methodologies and tools to tally and gather information for their ESG ratings. There are also several firms, locally and internationally, that do ESG evaluations while ensuring that your investments and bookkeeping adhere to laws within your jurisdiction – this along with ESG compliance and resiliency. Yet, in general, many companies use the standard reports made by the following independent companies:
- Global Reporting Initiative (GRI)
- Sustainability Accounting Standards Board (SASB)
- Global Initiative for Sustainability Rankings (GISR)
- Task Force on Climate-related Financial Disclosures (TCFD)
Why look into ESG factors?
With the recent increase in ESG consciousness amongst stakeholders, a better understanding of its effects will help us navigate around, and capitalize with ESG in mind. Below are our top 3 visions why ESG will help a company more.
1) Perceived to have better asset liquidationA recent increase in stock and funds were found in the US, as shown in the research by MoningStar. “The number of sustainable open-end and exchange-traded funds available to U.S. investors increased to 392 in 2020, up 30% from 2019”, MorningStar reported in their Sustainable Funds Landscape Report 2020. With the increase for sustainable funds in the market, there are more assets to share and liquidate around the pool.
2) Provides more jobs
ESG also proved to be a better job provider than other investment types. Research made by the World Resources Institute found that – “Solar PV creates 1.5 times as many jobs as fossil fuels and wind creates 1.2 times as many jobs as fossil fuels per $1 million on average.”
As capitalism is a shared web amongst investors, employees, stakeholders, and consumers, providing more jobs will pull the other aspects of it creating a bigger web with more opportunities for everyone.
3) Estimated to produce positive long term financial gains
Based on research by MorningStar, ESG investments proved to be better than their conventional counterparts. This aligns with the numbers provided by US SIF 2020. According to the study, ESG investments in the United States grew from $12.01T in 2018 to $17.10T in 2020 – the most rapid growth since 2015.
With the increase in numbers from the past half a decade, and the big fishes playing the field more and more, encouraging more investors to look into ESG investing, one can expect that numbers are to go up and up in the next coming years.
With the benefits mentioned above, corporate entities take ESG and its compliance reporting with a more comprehensive approach and ensure that it is embedded in company values and goals. Black Rock’s CEO, Larry Fink, addressed co-CEOs in his 2022 annual letter –
“We are asking companies to set short-, medium-, and long-term targets for greenhouse gas reductions. These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders.”Larry Fink, CEO, Black Rock
Applying ESG decisions for investments
When it comes to deciding which environmental and social factors to consider adding onto your investment; Nasdaq Contributor, Betsy Askins, suggests to “identify three to five measurable ESG criteria that are material to your businesses and your constituencies, and are aligned with your corporate strategies”. “For example, an oil and gas company that is fracking should measure water and waste management and impacts on scarce natural resources. If your business is centered around service personnel as Starbucks is, social training on anti-harassment and racial sensitivity will make consumers feel welcome and strengthen the corporate brand”, she adds.
“Identify three to five measurable ESG criteria that are material to your businesses and your constituencies, and are aligned with your corporate strategies.”Betsy Atkins, Nasdaq Contributor
On the other hand, there are many more criteria you can look into – these include climate change impacts, natural resource scarcity, supply chain management, labor practices, political contributions, board composition and workplace diversity and inclusion.
In the end, working with an analyst who can identify benchmarks that will be beneficial for you or the company will help not only in improving your ESG score, but also with aligning your ESG goals with your personal goals or company’s mission and vision.
As Larry Fink, CEO of BlackRock, shares in his Annual CEO Message 2022 “Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?”.
Our team at Bolder Group has the right experience and knowledge in structuring and administrating funds, investment companies and SPV vehicles on behalf of asset managers and family offices that want to be ESG compliant.
To learn more about what we do at Bolder, click this link.