ESG assets show the way forward in investments

As the spectre of climate change looms over the planet, investors are increasingly looking towards environmental, social and governance (ESG) investing in striking a balance between returns and taking positive action.

Nasdaq quotes a recent survey from PwC, which finds that certain ESG  issues are now among investors’ top five concerns, with 49 per cent  citing effective corporate governance and 44 per cent citing the need to reduce greenhouse gas emissions. Deutsche Bank, meanwhile, found that “more than half of investors (53 per cent ) regard climate change as the most important factor affecting their investment decisions, up from 47 per cent  last year.

In just a few years, ESG assets have grown to be worth trillions of dollars. Bloomberg estimated in a recent report that they could hit a massive $53 trillion by 2025. Green bonds, social bonds, sustainability-linked loans and related products provide excellent ways for companies to put their money where their mouth is, while accessing a more diverse investor base and even less expensive capital.

For investors, this means that having ESG in their portfolio will continue to pay off. A McKinsey survery showed that about 70 per cent of investors found a positive relationship between ESG scores and financial returns. According to accountancy firm Moore Global, businesses that express commitment to ESG have seen profits jump 9.1 per cent  over the past three years.

As investors increasingly factor ESG considerations into their decision-making, companies are under pressure to improve their ESG performance, research firm Qubix notes.

The last year has seen a seismic shift in the ESG and climate landscape, says equity index provider MSCI. “Regulators are upping the ante on everything from greenwashing to stricter climate target disclosures, while the war in Ukraine, disruptions in the energy market, rising interest rates and soaring inflation have all combined to produce a global cost-of-living crisis and renewed geopolitical and macro uncertainty. Add to the mix a spate of climate-induced disasters and the increased politicization of ESG investing, and it’s easy to see why investors have tended to tread cautiously as they seek to understand companies’ challenges and opportunities” noted Meggin Thwing Eastman, MSCI’s Global ESG Editorial Director and ESG Research Director, EMEA.

In 2023, MSCI has identified some key ESG issues that investors will face. These include the environmental effects of the Ukraine conflict, market conditions that could test investors’ commitment to climate change, regulatory pressures on ESG funds, the effect of deforestation on company balancesheets, and others.

So how does one pick the right ESG stock to make a change? Rebecca Cattlin, Financial Writer, Forex.com, offers some insights.

“Socially conscious investors evaluate stocks that are both profitable and align with their beliefs about corporate behaviour within a company – such as attitudes toward gender and ethnic diversity – as well as the effect the company has on the wider environment, such as its carbon footprint,”she says.

Even if you’re not a socially conscious investor, ESG investing is still a trend worth taking note of. “It will impact the profitability of companies over the long term, and impact the market’s perception of a stock. This could cause fluctuations should a company announce new ESG policies or go against existing ones,” says Cattlin.