The original version of this article, posted here with minor updates, appeared on the EconoTimes website on October 6, 2021, under the title Green Development LLC Discusses Top Reasons to Invest in ESG-Focused Companies.
ESG investing is not a new concept. Its roots go back to the early 1970s. Still, it is a strategy that is increasingly attracting the attention of individual and institutional investors who want to align themselves with organizations committed to responsible environmental, social, and governance (ESG) policies. Over the past several years, ESG investing has also proven to be a fiscally sound strategy. As the leading developer of large-scale wind and solar projects in Rhode Island, Green Development LLC wants to raise awareness of what it takes for an organization to commit to ESG initiatives.
ESG Defined
Socially responsible investing—focusing on corporations’ environmental, social, and corporate governance (ESG) practices—has gained traction with investors in recent years. Investment strategies that positively impact society and the environment while prioritizing financial returns can be a win-win-win situation between investors, corporations, and the planet.
The environmental component of ESG evaluates companies based on greenhouse gas emissions, carbon footprint, water usage, renewable energy, and other environmental concerns. The social criteria for ESG stocks cover aspects such as employee treatment and turnover, diversity and inclusion in hiring processes and promotions, overall corporate mission, customer service, and ethical supply chain sourcing. Lastly, governance includes high-level business ethics and leadership issues, including the transparency of shareholder communications, lawsuits, diversity on board and management teams, and conflicts of interest. This environmental, social, and governance trifecta offers ethically-sound investment opportunities that benefit the environment, workers, customers, and investors.
ESG Stocks Outperform Industry Peers
In comparing the stocks of ESG companies versus their industry peers over recent periods, stocks with high Morningstar Sustainability Ratings proved to be consistently less volatile than their non-ESG peers. The overall stock market decline during the COVID-19 pandemic proved the resilience of ESG funds. According to Arabesque, an asset management company, S&P 500 companies in the top ESG quintile outperformed those in the bottom quintile by over 25% between 2014 and 2018. In a 2016 study cited in the Journal of Sustainability & Finance, a comparison of 2014-2015 stock performance data demonstrated an average 6.12% higher equity return for ESG companies
In addition, JUST Capital’s JUST U.S. Large Cap Diversified Index (JULCD)—an index fund that tracks the performance of the companies in the Russell 1000 Index with high ESG scores—has consistently outperformed the Russell 1000 Index for three years in a row.
Amidst the Covid pandemic that caused extreme market volatility, Fidelity International’s Putting Sustainability to the Test report showed that stocks with the highest Fidelity International rating for sustainability (A-rated stocks and bonds) outperformed the MSCI AC World index.
Investors Avoid Financial Consequences of Corporations Not Complying with International Laws
Companies prioritizing eco-friendly initiatives avoid the current and anticipated carbon taxes designed to motivate private entities to curb their carbon emissions. Investment risk factors resulting from environmental negligence—such as BP’s oil spill and the Volkswagen emissions scandal that caused billions of dollars in losses and ultimately impacted investors—are not a problem for environmentally conscious companies. ESG investors reduce the downside risk of their holdings due to the inherent ethical values of the companies that they choose to support. As a result, they are less likely to be involved in environmental scandals or hit with fines for violating government regulations. On the contrary, sustainable practices pave the way for increased government support, subsidies, and insulation from increased environmental regulations.
ESG Initiatives Position Companies for Long-term Financial Success
Examples of ESG performance in the ever-changing sociopolitical climate are beneficial, but most investors are looking for long-term investments that will steadily increase in value over time. So how do ESG stocks measure up in the long haul? A massive review by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management analyzed over 1,000 studies published between 2015 and 2020 and found a positive relationship between ESG values and financial performance in 58% of the corporate studies. Most studies also revealed a positive relationship between financial performance and low carbon strategies. By evaluating the long-term success of ESG companies, corporations and their investors can make decisions that generate attractive financial results, while achieving the sustainability goals of stakeholders.