By now, most investors know they cannot expect to outperform their competitors if they are not putting their time and money into companies with a clear sustainability plan. That means investing in companies with a commitment to ESG programs. Therefore, ESG stocks, a type of sustainable investing, are at the forefront of risk assessment and company analysis. Learn more about the importance of ESG factors to investors, the programs companies can use to become more ethical and sustainable, and what you can do to make your business more appealing to ESG investors.
What Does ESG Stand for, and What Are ESG Stocks?
ESG stands for environmental, social, and governance. It refers to a method of business strategizing that prioritizes all stakeholders and recognizes that there is more to sustainability efforts than a commitment to environmental consciousness. Companies with ESG investing interests will commit to environmental sustainability through actions that produce calculable results, showing their ability to reduce negative environmental impact.
The social component reflects a company’s consideration of human relationships, internally with staff and externally with investors, suppliers, and others. The governance element displays a company’s ability to establish ethical operational policies with transparency. ESG stocks are shares in companies that produce a clear focus on these issues and use metrics to evaluate the results.
Why Is ESG Important for Investors?
ESG investors increasingly look for companies that report high ESG rankings and ratings because they are less risky and better positioned for success and addressing uncertainty. Instead of focusing on responsible funds and a company’s current financial status, investors align their portfolios with businesses that produce proof of strategies to address ESG issues.
ESG Factors Relevant Across Industries
The criteria investors look into for ESG stocks include:
- Environmental: use of renewable energy, efforts to reach carbon neutrality, disposal of products and recycling, methods for addressing water pollution and scarcity, position on climate change, and relationships with environmental regulation agencies
- Social: employee turnover rate, community engagement, workplace policies addressing diversity and inclusion, ethical supply chain practices, data hygiene and security, and mental health consideration
- Governance: the makeup of the board of directors, political contributions and lobbying efforts, guidelines for executive compensation, overall leadership transparency, policies for enforcing business ethics, and willingness to listen to and address stakeholder concerns
No single authority within individual industries or general business relations regulates a company’s efforts to meet these ESG criteria. Individual investors must use their judgment and knowledge of ESG factors to make investment decisions.
Evolution of ESG Investing Over the Years
ESG stocks and investing existed without the acronym for decades but came to the mainstream in the 1960s when companies began divesting in South Africa to protest the apartheid system. These practices continued in the following decade with the Vietnam War and quickly became a formalized practice.
In 1990, Amy Domini created the Domini 400 Social Index to focus on companies that began to prioritize social and environmental issues openly. Soon after, the United Nations held a convention to address climate change issues, with 154 countries in attendance. During the early 2000s, a global initiative discussing environmental issues was on every company’s radar, and sustainability was a topic of discussion for every department, from accounting to distribution.
In 2019, the Davos Manifesto established a set of ethical principles designed to guide companies on issues regarding customers, employees, local communities, stakeholders, and suppliers. The purpose was to bring transparency to how companies treat people. Then, in 2020, two large accounting firms released a whitepaper addressing standardized metrics companies could use to trace their progress with ESG strategies, and by 2023, ESG investing became a political issue in the U.S.
What Are the Benefits of ESG Investing?
For investors, ESG stocks offer diverse benefits, and it clearly works to lower risks and increase return on investment. The evidence is in the growing demand for ESG reporting around the world. Distinct benefits for investors include:
- ESG-conscious companies produce higher returns for investors and will outperform the companies that do not address sustainability adequately.
- ESG investing helps solve social and environmental issues and encourages companies to be more mindful of governance practices.
- A diverse ESG investment plan significantly lowers risk.
It can take time to see all the potential benefits of investing in sustainability because you need time to collect data, evaluate the impact of ESG programs on a company’s financial and social state, and objectively assess the results.
Creating a Sustainable Future for Businesses
The benefits of ESG investing are vast for businesses as well. With a strong ESG proposition, they can attract B2B and B2C customers through sustainable products and create better relationships with investors. Lowered energy consumption and reduced water waste will also cut operational costs and save money. By staying in good standing with government regulatory agencies, they open the door to more support and subsidies.
Implementing ESG strategies will also impact employee morale positively, drawing in more talent and uplifting productivity. Finally, ESG practices enhance company investments by allocating capital more efficiently and avoiding investments that may not work out because of potential environmental issues.
What Are ESG Programs?
ESG programs are the center of data collection, analysis, and reporting for a company’s ESG strategies. With a program, you can organize the efforts that matter in a report showing your progress. Programs allow you to automate and track the data you collect and align metrics with the standards set by your company or industry.
Building an ESG program starts with a team. You find people who are knowledgeable and passionate about ESG to help you develop a solid strategy. Next, you want to research the programs you already have in place and create benchmarks and goals. Determine who your stakeholders are and how your programs may impact them while keeping ESG topics at the center of your strategy. Set smart goals and search for areas of opportunity that will benefit customers, employees, and the company as a whole.
The data collection element of ESG planning creates value for ESG stocks. It opens the door for you to identify areas of weakness and communicates to investors that you have the future in mind and value sustainability.
How Do ESG Factors Influence Stock Prices?
The impact of implementing an ESG program into any element of business operations can vary significantly. They do not respond to every ESG-influenced development, but overall, there is a massive response to changes that improve how products impact customers. For example, any effort to increase affordability, safety, or protection of consumer privacy elicits a strong response from investors, directly impacting stocks. While some ESG programs may go unnoticed, you can nearly always rely on improved labor practices and a decreased environmental footprint to create a bump in stock prices.
What Are Some Examples of ESG Stocks and Their Performance?
Financial stability is a hallmark of companies committed to making the world a better place. The best stocks will reflect that through healthy returns. Examples of stocks rooted in ESG investing that present consistent success include:
- Microsoft invests in partnerships with minority-owned businesses and aims for 100% renewable energy by 2025. The company’s software products continue to generate subscription revenue, and the stocks generate high-percentage returns yearly.
- Best Buy continues to produce record earnings for stock owners and remains a leading electronics retailer in the country. At the forefront of their ESG investments are 100% waste diversion and a commitment to building teen tech centers in California.
- Pool is a manufacturer of pool supplies sold to contractors, pool builders, and repair businesses. Its market share is consistently on the rise, and its stocks are stable and rising in value thanks to ESG programs like their distribution of Eco Select products and participation in WaterSense, an EPA program.
- Cadence is a hardware and software company with an ongoing demand for smaller, faster, and smarter chips. The company generates high returns for shareholders and was one of the first multi-billion-dollar companies to achieve global gender pay equity.
Comparing the performance of ESG stock to non-ESG stock is relative and requires long-term data collection to see whether one outperforms the other. However, it is clear that overall, companies that invest in ESG attract more investors and are more likely to see long-term sustainability.
Are ESG Stocks Part of Your Future Investment Plans?
Every business owner, company executive, and investor should understand the value of ESG programs. Increasing company value, mitigating future risks, and boosting longevity and sustainability are on the radar of every stakeholder. To learn more about ESG stocks and investing, contact ESG Property Consultants to speak with an ESG consultant with experience and knowledge you can use to raise ESG ratings and rankings.