Sustainable Investing is a ‘buzz phrase’ you may have heard making the rounds recently. You may think that this some environmentally related cliché, which will fade away as quickly as it emerged. truth be told, it is gaining exposure the world over! Since the dawn of industrialization, some 250 years ago, the human race has been polluting and depleting the natural environment at an alarming rate,, Through scientific research and increased education, we are more aware of the ticking time bomb and the need to be more active in sustainability. Activism has increased, people are generally accepting of changes that must be done, but is this enough?
In the investment world you may have heard of the term ESG, an acronym that refers to Environment, Social and Governance; is a set of criteria a company works towards to operate responsibly.. Environment is self-explanatory, dealing with such factors as climatic risks, and resource scarcity The Social aspect addresses human rights diversity and equality, both within and out with the workplace. Ethics, company transparency and innovation is covered by the Governance aspect.
Companies are given a score against these three criteria. A sustainable approach to investing, whether we expected it or not, is happening right under our nose. Two of the larger asset managers, whose assets far exceed eleven trillion dollars, have backed ESG ratings as a way forward. . Proof of this is seen when analysing investments in equities who hold ESG ratings, with mandates exceeding $30 trillion, a sum greater than the market capitalization of the S&P500.
Despite its allure, investors will question if their portfolio will profit from ESG strategies. It is undisputable that profitability determines how investors allocate their capital. There is substantial evidence showing that investing directed through an ESG strategy generates excess returns.
Various research articles investigating ESG rated companies, found evidence that indicates that over a ten year period , investing in a portfolio of highly rated ESG companies vs non ESG rated, generated a slightly higher return, at a statistically significant lower volatility. Further research shows, ESG corporations, have lower betas, higher capitalization and price to book ratios.
In the long term, the shift to environmentally sustainable investing will address the concerns of society as a whole. Businesses have pursued their profit maxim and at the expense of other stakeholders. Environments have been depleted, destroyed or damaged, people have been exploited and taxes evaded. Society at large is being driven towards greater accountability, it is only natural that the same is expected of companies the world over.
Daniel Gauci is a Financial Advisor at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, views and opinions provided in this article are solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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