The Business Case for ESG Investing

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ESG Investing
ESG Investing

Investment decision-making has become more complex in the past few years. Increased market volatility, disruptions, economic fluctuations, and other factors have affected investment decision-making. Some investors are even willing to compromise long-term sustainability for immediate profits. It is why some investors are increasingly investing in short-term assets and companies.

Experts within the investment industry are now shifting their focus to ESG (Environmental, Social, and Governance) factors. Asset managers, trading firms, investment banks, corporate firms, and individual investors have started using ESG Solutions for finding long-term and sustainable investment opportunities.

Read on to understand the business case for ESG investing in today’s scenario.

Understanding the investment horizon in today’s scenario

Do you know about the investment horizon in today’s scenario? According to experts, today’s average investment horizon has become shorter. The investment horizon is the time an investment takes to achieve its goal. The investment horizon has been long and flexible in the past few years. In 2023, individuals and companies will have shortened their investment horizons. They are increasingly investing in short-term opportunities that provide immediate profits. Investing in short-term opportunities is not the real problem. Investors need to pay more attention to sustainability while finding suitable opportunities.

In this era of uncertainties and disruptions, you need something that offers long-term profits. Dedicate some of your investment funds to something that offers long-term returns. It is where ESG factors come into the picture for investment decision-making. Investors have now started investing in companies that focus mainly on ESG factors. A company focusing on ESG parameters like energy efficiency and air pollution is suited for the long run. In this ever-changing world, unsustainable companies struggle to survive. On the other hand, sustainable companies allow investors to increase their investment horizons significantly and earn long-term profits.

Must Read: The Impact of COVID-19 on the Municipal Debt Market

Are ESG investments profitable?

At the end of 2025, ESG investments will likely cross the USD 50 trillion mark. Since 2016, ESG investments have nearly doubled globally. Different studies measured the performance of ESG companies. In all studies, ESG companies have outperformed non-ESG entities significantly. In the past few years, many ESG-focused companies have beaten their category index, offering high returns to investors. ESG investing options have now widened and are not limited to buying equity in corporate entities. ESG companies have also started issuing corporate papers, bonds, and other debt securities.

Have you ever thought about why ESG companies beat their peers in today’s scenario? ESG companies are better suited to manage different risks to business continuity. For example, ESG-focused companies were able to mitigate the risks of the recent pandemic. On the other hand, non-ESG companies ceased to exist during the COVID pandemic. Even if you do not understand these things, you can use ESG solutions to make informed investment decisions. A company that cares about the environment, employees, and society will always have better chances to grow. Such a company will not be prone to compliance risks, likely related to the welfare of employees and the environment.

How to make ESG-based investment decisions?

Do you know that around 33% of millennials exclusively consider ESG factors before making an investment decision? If you have decided to make ESG-based decisions, you must know a few things. The first step is to analyze the ESG score of a particular company (public or private). It is possible to calculate the sustainability score after analyzing various factors. Usually, the ESG rating agencies give scores between 0 to 100 to any company, 100 being the highest. Analysts use a wide range of qualitative and quantitative parameters to derive the ESG score of a company. If the ESG score of a company is private, you might have to research more.

Individuals and companies need to learn how to calculate ESG scores. It is where new-age ESG solutions come into the picture. One can find software solutions that input qualitative and quantitative factors and calculate the ESG score. 

Here are some factors used to calculate the ESG score of a corporate entity:

· Carbon emissions

· Product Safety

· Board diversity

· Executive compensation

· Anti-corruption practices

· Shareholder rights

· Employee safety

· Ecosystem management

· Carbon emissions

Some organizations need the right tools to perform ESG research and analysis. In such a case, they can partner with a third party known for its research-oriented services. The organization does not have to hire ESG analysts, as the third-party firm will manage the ESG research process.

In Conclusion

The investment industry is changing and moving towards sustainability. There is no need to sacrifice long-term returns in search of immediate profits. One can rely on automated ESG solutions to make informed decisions in today’s high-risk business environment. Start focusing on ESG factors to make better investment decisions!

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