The investment landscape has changed drastically over the years. Investors around the world have become more responsible towards the environment and society. Investors are now looking for sustainable opportunities to leave a positive impact on their surroundings. For the same rationale, investors consider ESG (Environmental, Social, and Governance) parameters. Besides helping with decision-making, ESG factors can help make long-term or sustainable investments. Similar to credit scores, investors can now find ESG scores of different corporate entities or issuers. New investors or beginners must be aware of the ESG basics, as it will help them make better decisions. Continue reading to learn more about ESG research and responsible investment strategies.
What Exactly is ESG Research?
It is essential to understand the ESG basics before delving deeper. ESG Research helps investors make responsible or sustainable investments. It involves analyzing the environmental, social, and governance factors of the issuer or company before making investments. Here are the three main categories in ESG:
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Environmental: Environmental factors in ESG determine the impact of a company on the environment. The ‘E’ in ESG includes factors like greenhouse gas emissions, carbon footprint, energy consumption intensity, water consumption intensity, and reusability. ESG investing does not leave a negative impact on the environment, thus boosting sustainability.
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Social: Social factors help analyze the impact of a company/issuer on society, including its employees and customers. For instance, a company practicing forced labor might not have a good ESG score. Also, it will be penalized or sanctioned by the concerned authorities sooner or later. Equal representation, equal remuneration, human capital management, customer protection, personal data security, and innovation in customer relations are a few social factors.
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Governance: Governance factors help analyze the internal policies of a company. These factors shed light on the governance or administration within a company. Accountability, internal controls, strategy implementation, ethics, and integrity of conduct are a few governance factors.
ESG research analysts use the above factors to determine the sustainability of an investment opportunity. Several ESG factors become mandatory for companies, as they are imposed through regulations. For instance, companies polluting water bodies near them might be penalized by the state or concerned regulatory authorities.
Demystifying Responsible ESG Investment Strategies
ESG investing is comparatively new in many jurisdictions. New investors might not be familiar with ESG research practices. Here are some of the best responsible ESG investment strategies to make better decisions:
Exclusionary Screening
It is an essential ESG strategy for responsible investors. It helps eliminate those companies or sectors that do not fulfill the given conditions. For instance, you might eliminate all companies or sectors that do not leave a positive impact on the environment. By doing so, you will be left with companies and sectors having a positive impact on the environment.
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Positive Screening
Contrary to exclusionary screening, positive screening selects companies or sectors based on ESG factors. For instance, you can select the top ten companies in a market with the best governance practices.
ESG Scoring
It is one of the basic practices among ESG investors. A company can be given an ESG score (out of 100) based on its business practices. Many reputed research firms have already scored the top companies in different markets. You might have to indulge in research activities to find the ESG score of a small-scale or unrated company. ESG scoring can help investors screen the best companies with a positive impact on the society and environment.
Activist Investing
It is usually implemented by large-scale or institutional investors. These investors purchase stocks of a company in large proportions to influence the ESG strategies in the future. The shareholder can drive the company to follow ESG goals, thus leading to sustainability.
ESG-Themed Investing
You can take one or more ESG factors and find companies that address them. Investing in the same companies will be termed ESG-themed investing. For instance, some investors might be interested in wastewater treatment. In such a case, they can find companies contributing to water treatment and make investments.
Conclusion
ESG research has become essential in today’s high-risk scenario. ESG investing can help build sustainable portfolios and earn long-term returns. Organizations and investors can contact Acuity Knowledge Partners for ESG research services and solutions. Start implementing ESG strategies for informed investment decision-making now!
