Environmental, social and governance (or ESG) investing has become increasingly popular over the last decade.
The idea behind it is to invest in companies that are socially responsible and sustainable.
How much should I invest in environmental, social and governance (ESG) issues?
What are the risks involved?
This guide to ESG investing in Singapore aims to provide some insights into the topic.
What is ESG Investing?
ESG (environmental, social and governance) investing is a way of investing that seeks to identify companies with positive environmental, social, and governance practices.
This approach has been growing in popularity over the last few years as investors look for ways to invest their money that are more aligned with their values.
The term “ESG” was first coined in the 1990s by Michael Jensen, an American finance professor, who argued that investors should also consider factors such as corporate governance when making investment decisions.
ESG investing focuses on identifying companies that are doing well not just because they are cheap but because they are good businesses.
It looks at how a company operates and whether it treats its employees well, for example, rather than simply focusing on price.
Why Should I Consider ESG Investing? What Are The Benefits Of Doing So?
There are several reasons why you may want to consider using ESG investing. Here are some of them:
- You care about the environment.
- You care about human rights.
- You care about ensuring your investments work towards sustainable development.
- You want to support companies that treat their workers fairly.
- You want to ensure that your investments will be around for future generations.
- You want to make sure that your money goes to where there is a need.
Environmental factors in ESG Investing
In order to understand what makes up ESG investing, we must first understand what constitutes an environmentally friendly business.
Environmental impact – this includes things like pollution, waste management, water usage etc.
When considering these issues, one of the most important aspects is sustainability. A sustainable business will try to reduce its negative impacts on the environment while still maintaining profitability.
Sustainability is often considered to be the key difference between a green business and a non-green business.
A great example of a company that uses ESG principles is Patagonia. They use organic cotton in all of their products, which means that they do not use pesticides or chemical fertilisers.
The company sells only clothes made from ethically sourced materials and does not test their clothes on animals.
Social factors in ESG Investing
Another aspect of ESG investing is looking at the social side of a company.
These include things such as worker safety, child labour laws, minimum wage, anti-discrimination legislation, and tax avoidance.
Companies that are socially responsible tend to be better for the world overall. For example, if a company is employing slave labour or have child sweatshops, they’re not considered as a company that adopts ESG practices.
Companies that are socially responsible tend not to harm others.
This could mean avoiding harmful practices such as selling alcohol to underage customers, or employing children, or even selling harmful products such as marijuana, tobacco, or gambling.
Governance factors in ESG Investing
Finally, governance refers to the way in which a company is run. Governance can include things such as board composition, corporate transparency, and executive compensation.
If a company has a high proportion of independent directors then it is likely that the decisions being taken by the company are based on the best interests of shareholders.
It is important to note that ESG investing does not necessarily involve buying shares in companies that meet all of these criteria.
Instead, it involves looking at each individual company and deciding whether it meets the standards set out above.
ESG Investing strategies
There are generally 2 common ways how investors adopt ESG investing – negative screening and positive screening.
Negative screening is when you look at a particular company and decide that it doesn’t fit into any of the categories outlined above.
This usually happens because a company is involved with activities that you don’t agree with.
For example, you may think that a company’s product line contains too many chemicals or that they employ people who work under poor conditions.
In this case, you would avoid investing in them.
This strategy generally rules out entire sectors that don’t meet ESG practices.
As mentioned, this could be ruling out tobacco, gambling, or weed sectors entirely.
On the other hand, positive screening is when you look through a list of potential investment opportunities and identify those that match the requirements of ESG investing.
You might choose to invest in a company that produces renewable energy instead of fossil fuels, or invests in ethical clothing rather than unethical ones.
Unlike negative screening, this strategy compares companies on their ESG efforts against their competitors to determine whether they meet set guidelines.
This could mean having lower ESG scores than other industries, but at least these companies are trying to improve on their business practices.
Advantages of sustainable investing
There are many advantages to using ESG investing. One of the main benefits is that it helps investors to avoid making bad investments.
When you invest in a company that is not sustainable, you may end up losing money as they may face consumer backlash due to negative practices.
However, when you invest in a company with good environmental or social policies, you know that you are doing something positive for the planet and society.
ESG investing also allows you to invest in companies that are going places. Many companies today are trying to improve their image and become more sustainable.
By investing in these companies, you can help them to grow and succeed.
ESG investing can also make your portfolio more diversified. You can invest in different sectors and industries that are environmentally friendly and socially responsible.
This will give you a wider range of investment opportunities and reduce the risk that one sector might go down.
Disadvantages of sustainable investing
However, there are some disadvantages to ESG investing. The first disadvantage is that it takes time and effort to identify companies that are sustainable.
You need to spend hours researching each company and reading about what it stands for.
Another risk associated with sustainable investing is that companies may try to manipulate how they present themselves.
For example, if a company wants to appear as though it is sustainable but actually isn’t, it may use misleading information to convince investors.
This is harder given that there are no set ESG guidelines globally that companies should follow.
However, there are independent NPOs and financial firms that are doing this based on their own guidelines, but it’s still a long way to go before this gets standardised and easier.
The final disadvantage is that it can take longer to get returns from sustainable investing. Because most companies are still improving their sustainability policies, they might not produce strong financial results.
For example, if a company is previously employing cheap labour and are now trying to meet ESG guidelines, their expenses will increase.
As a result, it can take longer for these companies to reach their full potential and generate profits.
Things to look for when choosing ESG companies?
So, while ESG investing has its pros and cons, here are a few things you can consider when looking for companies that are sustainable:
1) Is the company transparent?
If a company is transparent, then you know exactly where it got its funds and whether it uses any harmful chemicals or processes. Check their annual reports or sustainability reports for this information.
Companies who adopt ESG practices are usually transparent, and if they’re not, it might be an indicator that they’re hiding something.
2) Does the company have an ethical code?
Companies that have an ethical code are usually those that care about people and the environment. These codes may include animal welfare, human rights, and so on.
3) Are the employees happy?
If workers are unhappy, chances are that the company won’t do well either. Check Glassdoor reviews to see what their employees are saying about them.
4) Can I find out more information about the company easily?
If you want to learn more about a particular company, you can check out their website. They should provide all the relevant information such as their mission statement, contact details, and so on. You can also ask them questions through social media or email.
5) Is the company environmentally friendly?
If a company claims to be eco-friendly, then it means that it tries to reduce pollution and use renewable energy sources. However, counter-check this claim against other sources to see if they really are eco-friendly.
6) Does the company have a positive impact on society?
This is similar to the previous question but focuses more on how the company affects others. For example, if a company helps children, refugees, or underprivileged individuals, this is considered socially responsible.
7) Is the company making money?
It’s important to note that some companies exist purely to make a profit. However, there are many companies that are profitable but also try to improve the world.
Ultimately, your goal as an investor is to make money. If the company is struggling financially, it might not be a good choice even if it’s socially responsible.
ESG investing is becoming increasingly popular among investors because of its benefits. It provides long-term value and helps the planet by reducing carbon emissions.
However, it does come with its own set of challenges. As a result, it’s important to research each company thoroughly before deciding which ones to invest in.
I hope this post helped you in doing your research.
If you need help to invest, we recommend talking to our partner financial advisors for help.
Frequently Asked Questions
To qualify as an ESG investment, companies must consider environmental, social and governance factors when making investment decisions. This includes investing in renewable energy projects, sustainable agriculture, responsible forestry practices, and socially responsible businesses. The goal of these investments is to create a long term positive impact on society.
Yes, ESG investing is here to stay. The world has changed since the financial crisis, and now we know that the environment matters. Investors want to invest in companies that care about the planet and society, and they are willing to pay for it. This means that ESG investing is here for the long run.