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Higher ESG rating, higher return

Indeed the ultimate goal of any investment is to earn a maximum return. But as the focus has increased on sustainability, investors worldwide are resorting to smart investing strategies. In the current investment scenario—where environmental sustainability and corporate social responsibility are driving business decisions—investors place a great deal of emphasis on the environmental, social, and governance (ESG) rating of a company they wish to invest in.

Take a look how to easily automate, monitor and assess your ESG posture:

ESG criteria are becoming increasingly popular amongst investors to evaluate the ability of companies to be stewards of nature, managers of social relationships, and trailblazers of excellent leadership. Now, ESG companies that uphold the principles of smart investing while catering to the needs of socially conscious investors are seen outperforming their peers in a big way, especially after the COVID-19 pandemic.

In 2020, the year of extreme and dramatic changes trigged by the pandemic, the median total return on equity funds of ESG companies focused on sustainability exceeded that of their peer funds by 4.3 percentage points. Funds of such companies provided better returns almost every month of the year. Their focus on sustainability is essentially indicative of the quality of their board and management.

Low beta, high quality 

The companies with higher ESC ratings fell and rose less dramatically as the markets collapsed and recovered sharply in April 2020 than those with lower ESG ratings. The pattern suggests that stocks of such companies also have a low-beta-high-quality factor. Such funds are also less affected by volatility in the larger market.

There’s been a significant rise in the popularity of ESG investing. It is mainly triggered by fears of the global community over climate change. As such, socially conscious investors, especially millennials, now consider the impact of their funds as they have started investing. It’s crucial to note and understand that ESG risk is an investment risk; those firms that meet ESG standards are more unlikely likely to be sustainable enterprises.

Similar trends were observed when fixed income ESG stocks were analyzed from January to September 2020. The bonds of ESG companies with high ratings performed better on average than their lower-rated peers. The stocks of companies with an A-rated ESG score lost around 0.5 percent on average during the period compared to low-rated stocks, which lost 4.6 and 4.4 percent.

A peek into the future.

ESG and smart investing with a focus on sustainability are expected to grow. The attitude of retail investors towards sustainable investment has also been shifting. In the U.S., close to half of individual investors adopt sustainable investing. Also, 80 percent of asset-owner institutions are seen incorporating sustainability factors in their investment processes.

It’s also worth noting that the Institute for Sustainable Investing, in 2019, found that sustainable funds had larger market capitalizations on average and hold more stocks in companies that are considered growth stocks. Let’s not forget. Evolving regulations also lead companies to disclose their sustainability practices, providing investors with more data to understand ESG-related risks and growth opportunities. We can hope that the future of sustainability investing delivers on its promises and make a positive global impact in the times to come.

Get started with your ESG journey easily with Findings ESG.

ESG investing is becoming popular as awareness grows about the impact of corporate actions on the environment, society, and governance. This article will look at how ESG Investing works and some of the benefits and drawbacks of this growing movement. What should you consider when including this type of investment in your portfolio?

What are the essential characteristics of an ESG investment strategy?

Many factors make up an ESG investment strategy. For a company to be an ESG investment, there must be exposed to environmental and social aspects. Exposure to these factors can be defined by three characteristics: alignment, integration, and recognition. All three of these characteristics must be present to exhibit an entire ESG investment strategy. By adopting one or more of these strategies, they can better prepare themselves in times of need.  It is much easier to come back from challenging situations when you are ready. It takes careful planning, diligence, and perseverance to fully adopt an ESG investment strategy. However, if done correctly, these practices will strengthen your company and increase its value over time and preserve its reputation within its community.

How do I make sure my fund managers follow an ethical approach?

The first and most basic way to make sure your fund managers take ESG into account is to ask them. As with any other question, you should call them up and ask if they use sustainability metrics in their investment process. They’ll tell you, Of course, we do (which might or might not be true), and that will give you a sense of how serious they are about ESG investing. If you like what you hear and want to invest, you can trust that your money isn’t funding unethical companies. But if they seem mysterious, or worse—dismissive—then it could mean that there aren’t good incentives in place to keep fund managers accountable for their actions. That would indicate an unethical culture at your mutual fund management firm.

Why is this different from other kinds of socially responsible investing?

The social responsibility aspect of ESG investing isn’t just about environmental or social impact but may include these factors. It also aims to be financially responsible and considers an investment’s impact on other financial indicators such as price volatility, liquidity, earnings growth, operating efficiency, and capital preservation. These features are often not found in socially responsible investments as they tend to focus on issues surrounding environmental or social effects. As a result, many consider ESG to be more than just socially accountable investing — because it includes financial indicators and increased engagement with companies — while others think it is just another kind of SRI.

When did this become popular? And why should I care now?

After decades of playing second fiddle to shareholder-value investing, ESG has emerged as a star in its own right. Even though sustainability and corporate ethics are still relatively new concepts in business management, concerns about social issues have been around for thousands of years—and they show no signs of fading away. That’s why more and more investors are looking at companies through an ESG lens.

Some examples of funds in this space and their returns over time.

Newfield ESG Long/Short Fund (EQLIX), Calvert Social Investment Strategy Fund (CSLFX), Vanguard FTSE Social Index Fund ETF (VFTSX). After a rocky start, there are signs that environmentally conscious investing has been growing in popularity—more than 150 socially responsible mutual funds with $200 billion in assets under management. Still, concerns remain about what kinds of businesses these investment funds hold and their role in helping companies change their behavior to protect employees and the environment better. 

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Sustainability has become an integral part of how we do business and live our lives, and the concept of ESG investing has taken hold with investors and financiers alike. What are green bonds, and why do they matter? Read on to find out!

3 key ways green bonds improve corporate sustainability

green bonds increase access to capital for sustainable projects; green bonds help decrease reliance on fossil fuels, and green bonds help finance critical social programs. We’ll examine each of these ways in detail below.

An introduction to green bonds

Undertaking a green business venture or a project is by no means cheap. The costs of starting up an alternative energy project could run into millions of dollars. And even if you secure funding for such projects through loans or grants, those payments will add to your operating costs over time. However, governments worldwide have been easing financing concerns through what’s known as green bonds — debt securities that raise funds to support environmental-friendly endeavors. More recently, private organizations have been taking up their initiatives in making it easier for entities engaged in green initiatives to raise funds from investors. These so-called green bonds have several advantages over conventional debt offerings. You need to know about them: 1) What are Green Bonds? 2) How Do They Work? 3) Where Can You Buy Them?

The history of green bonds

The idea of a bond linked to environmental, social, or governance criteria – known as ‘green bonds’ – originated in 2003 when HSBC issued its first ecological bond in response to investor demand. This was followed by BNP Paribas with its first Corporate Sustainability Bond in 2005. Today there is greater recognition of ESG issues from governments, investors, and issuers than ever before. Green bonds have increased over recent years. In 2010, only three green bonds were issued globally; today, it is not uncommon for international financial centers like London to see two or three different green issuance rounds each week.

How is a green bond different from any other bond?

A green bond is no different from any other bond in that it is debt security – a loan – given by an organization to raise money for any purpose. However, green bonds typically have specific criteria which make them eligible for being classified as green or environmentally friendly. They tend to be used exclusively for projects with positive environmental or social impacts, whether that means energy efficiency retrofits or renewable energy generation. These bonds are commonly referred to as ESG bonds (Environmental Social Governance). An investor who wants to include more green investments in their portfolio can purchase ESGs because these securities contain safeguards against non-environmentally friendly use of proceeds. In short, if your company has borrowed money through a green bond, you must use that money only on activities with positive effects on people and the planet. This way, investors can feel good about making such investments while knowing they’re getting solid returns.

Challenges in the market for Green Bonds

The market for green bonds remains relatively small, but both public and private sector actors recognize a need to increase access to capital for climate-friendly projects. In October 2017, Sustainable Finance Lab, in conjunction with The Rockefeller Foundation, released its second Climate Finance Survey. The survey results reveal that limited capital and coordination are among the most significant barriers to scaling up investments in clean energy. One of those critical challenges has been high transaction costs, or what is often referred to as the pipeline problem. Green bond issuance data from Bloomberg New Energy Finance (BNEF) shows that transaction costs for green bonds have been more than double those of comparable rated corporate bonds since 2008. This means that investors looking to invest in low-carbon infrastructure through green bonds were paying too much due to inefficient issuance processes. As a result, some financiers had said that there was limited interest amongst potential institutional investors when investing in them.

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Social and ESG: What’s the deal?

Social and ESG are two acronyms often used in the investing world, especially when looking at impact investing (sometimes called Socially Responsible Investing). There’s no denying that both have made an enormous difference in the world we live in, but there’s also debate over what they mean to the average investor—or if they even matter at all. To help cut through some of the confusion, here’s a breakdown of what Social and ESG mean in this context and how they can make all the difference to your portfolio.

The United Nations have adopted social and environmental goals to achieve globally by 2030.

Part of their sustainable development goals (SDGs) is 17 goals adopted by 189 countries to achieve globally by 2030. They include ensuring quality education, affordable healthcare, economic growth, gender equality, and climate action. And each one is linked to one or more of what is called sustainable development pillars – like climate action or health – that together make up a foundation for sustainable development.

How will it affect you as an investor?

As investors, we are primarily concerned with two fundamental things regarding our portfolios— whether or not we make money (i.e., portfolio return) and whether or not we incur a loss (i.e., portfolio risk). The problem with relying on portfolio risk as your primary performance indicator is that it only tells you how much you will gain or lose on your investment. It says nothing about your actual returns. However, by also including social considerations in your investment research process, you can improve both of these numbers (portfolio return and portfolio risk) at once. This gives you a more complete picture of potential investments than relying solely on traditional metrics such as total return, alpha, beta, and Sharpe ratio. So what do we mean by social considerations?

Do you support the SDGs?

UN member states adopted the SDGs in 2015, which was quite a feat as they are an ambitious set of goals with targets spanning 2030. Goal 16 is dedicated to promoting peaceful and inclusive societies for sustainable development while also calling on national governments to promote social justice and reduce inequality within their borders. 

How does it help with your portfolio management/target audience?

Investors have noted recent research on sustainability—also known as social and environmental governance, or ESG, issues—and found it helpful. It can help investors in a few different ways.

First, incorporating ESGs into investment analysis allows asset owners to align their investments with their values better.

Second, socially responsible investors can use investments with a positive social impact to raise capital for social ventures. In fact, according to some experts, social entrepreneurship could be one of the most effective ways to reduce inequality and increase prosperity around the world.

Third, investing in sustainability-focused companies is often associated with superior performance for both companies and shareholders. For example, since its inception 21 years ago, Calvert Impact Investing Index Fund has outperformed S&P 500 by nearly 2% per year. 

This represents just one approach; other sustainable investing strategies also exist. The key, though, is to find something you’re comfortable with (that fits your time horizon, risk tolerance, and financial goals) and then stay focused on it.

Social ESG made easy.

At Findings, we urge our clients to track and report their ESG performance via our Findings ESG solution; Reporting your social efforts shouldn’t be different.

Remember that integrating an easy-to-use, cost-efficient solution can ease your way into ESG compliance while using industry best practices to elevate your current efforts.

[Discover how you can use Findings ESG for your needs] 

An energy-efficient ESG strategy a can help you reduce your carbon footprint, improve your operations and ultimately boost your bottom line. Here are five best practices to get you started.

1) Strategy on Energy

Energy efficiency is an essential part of every business’s Environmental, Social, and Governance (ESG) strategy. Energy efficiency will also be one of your most significant competitive advantages. According to an NRDC report, Energy efficiency measures that could be implemented at USS industrial plants are estimated to reduce emissions of greenhouse gases by more than 170 million metric tons per year—roughly equivalent to taking over 60 million cars off thU.S.S. roads and highways each year. That said, there’s still room for improvement—and many companies aren’t tapping into their full potential when it comes to energy efficiency strategies. To maximize energy efficiency, you should take a holistic approach: consider low-cost and high-impact changes such as implementing variable speed drive on air compressors or modifying production schedules to shift work hours in lower-cost periods. 

2) Portfolio Impact

Having a diverse portfolio is one of the most critical factors in mitigating risk and driving returns. An investment strategy centered on energy efficiency fits into several strategic asset classes, including waste management and infrastructure. This strategy can help drive social value and financial returns, which makes it an ideal addition to any portfolio. Recent research has shown that energy efficiency has grown from 20% of total global power consumption in 1996 to 33% today. Additionally, 1/3rd of greenhouse gas emissions originate from inefficient equipment, buildings, and vehicles.
Nevertheless, companies continue to spend money on building new data centers and extensive facilities without an effective method for operating their systems efficiently or effectively reducing their carbon footprint through clean energy sources. To mitigate risk across your portfolio as well as position yourself ahead of competitors focused on best practices in energy efficiency, consider these 5 ESG bE.S.G. practices:

• Provide transparency into energy performance;
• Implement energy-efficiency programs;
• Obtain certifications related to sustainability;
• Conduct investment analyses that consider environmental impacts;
• Engage with your customers.

3) Climate Change Mitigation

When it comes to climate change, we must act now. That’s why companies are increasingly putting climate change mitigation into their everyday operations—including energy efficiency. By taking small, preventative measures like using more efficient appliances and installing sensors and intelligent lighting systems, companies can ensure that they’re doing their part to reduce their carbon footprint. These investments will often pay off in less time than you might think! Just look at Toyota with its energy action plan: cutting CO2 emissions by half over 20 years.

4) Resource Conservation

It’s difficult to quantify how much energy is wasted every year, but conserving resources is a good idea regardless. While renewable energy is ideal, reducing consumption and using efficient equipment goes long. It has been shown that companies who embrace resource conservation as part of their environmental responsibility can save over 40% in waste reduction costs. At minimal cost, that’s an opportunity any business cannot afford to pass up.

Want to know more about how to embrace ESG best practices effortlessly? See what Findings can do for you.