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What Is ESG Investing?

Published on November 5, 2021

Corporations and their investors are focused on environmental, social and governance issues.

ESG has emerged as an influential framework for measuring long ignored factors seen as essential to companies, industries and society.

If you are one of the millions of people who haven’t had much real interaction with ESG beyond hearing or reading it in the news, then this is the blog for you. Welcome to Purpose Brand’s quick primer on ESG: what it is, when it started, where it’s going and why it matters.

What ESG Stands for

ESG is an abbreviation for environmental, social and governance. A company’s relevant ESG factors can vary based on sector and industry, but to different degrees many are common to all.

How ESG Works

ESG works by identifying, structuring, measuring and tracking a range of metrics that define a company’s impact, positive or negative, in terms of the environment, society and culture, and corporate governance.

  • Environmental factors measure a company’s performance as a good steward of nature and its impact on the biological environment shared by all living things. Common environmental factors include such things as a company’s carbon footprint; usage and disposal of toxic chemicals in manufacturing processes; and corporate sustainability initiatives and campaigns.
  • Social factors reflect a company’s relationships and impact on its varied stakeholders, not only stockholders but also employees, customers, suppliers and communities. ESG social factors include everything from inclusion in hiring, advancement and leadership (such as gender equity, racial diversity and LGBTQIA+ equality) to corporate philanthropic initiatives.
  • Governance factors reflect how a company is run. Common governance considerations include executive compensation practices, diversity in C-suite and boardroom leadership,  shareholder rights and responsiveness to stakeholder feedback.

When ESG Started

While the formal ESG framework is relatively new, the concept of responsible investing has been around for some time. As investment research firm MSCI explains, ESG-related consideration have informed investors’ decisions for decades:

The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime. Today, ethical considerations and alignment with values remain common motivations of many ESG investors but the field has expanded to consider financial materiality as well. Many investors now look to incorporate ESG factors into the investment process alongside traditional financial analysis.

ESG as we know it today got its first formal introduction to the global investment community in a 2004 white paper sponsored by the United Nations and the Swiss government, Who Cares Wins: Connecting Financial Markets to a Changing World

Where ESG Is Going

Despite debuting to much fanfare, it took a while for ESG to catch on. Indeed, ESG only truly made it into the public zeitgeist in the wake of the Great Financial Crisis of 2008-09, which precipitated a widespread rethink about its proper role in 21st century society.

Interest in ESG has exploded in recent years, with investor allocations to ESG-focused funds and managers setting new records annually for the past five years in a row. ESG funds attracted $51.1 billion in new investment in 2019, more than double the figure raised the year prior.

Who Invests in ESG

Investors and capital allocators have shown a growing appetite for ESG investments over the past half-decade. Climate change has surfaced in corporate risk calculations and capital plans. Issues ranging from gender and racial income inequality to lack of diversity and inclusiveness in the workplace have influenced how both the public and the investing community measure the full impact of investment decisions.

Asset managers have proven more than eager to service the voracious demand for ESG, leading to a remarkable proliferation of ESG products that range from vanilla index funds to exotic active strategies.

BlackRock, the world’s largest asset manager, has been one of the keenest players in this rapidly expanding sector. The firm has brought a host of ESG investment products to market, but that has been only the start . BlackRock has also begun to shift its overall asset allocation strategy to reflect its deepening commitment to ESG and social impact. Last year, BlackRock made its most stunning ESG commitment to date, announcing its intention to divest from fossil fuels, starting with its coal assets (alone worth tens of billions of dollars).

Why ESG Is on the Rise

Powerful individual and institutional forces have converged to drive ESG’s exponential growth. In just a few short years, ESG has risen from relative obscurity to become what is arguably the most significant macro trend shaping capital markets today. Investors, companies and policymakers alike ignore the rising force of ESG at their peril.

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