In recent years, Environmental, Social, and Governance (ESG) investing has gained significant attention in the financial industry. ESG investing takes into account the environmental and social impact of a company’s activities, as well as its governance practices. For many people, ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, shareholders, customers, and the environment. The growing importance of ESG has been represented in investments, as according to McKinsey and Company, inflows into sustainable funds, for example, rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021. The concept of ESG investing has become increasingly relevant as investors seek to make socially responsible investments that align with their personal values.
As said by Mike Walters, CEO of USA Financial in an interview with Forbes Advisor: “Identifying the impact, positive or negative, on these stakeholders is what should become the measuring stick for quality ESG investing. This is important for the obvious impactful reasons relating to each stakeholder, but it also can be used to identify the strength and sustainability of the company itself.”
In this article, we decided to explore the reasons why ESG matters for long-term investment success. Are you ready?
Four reasons why ESG matters for long-term investment success
Reason 1: Companies that prioritize ESG factors tend to be more sustainable in the long run.
Companies that focus on ESG factors are more likely to have a long-term focus on their business operations. By taking into account environmental and social risks, these companies can mitigate risks that could impact their business in the future. For example, companies that prioritize environmental sustainability are more likely to avoid environmental scandals, such as oil spills or toxic waste leaks, which can result in significant financial losses. Similarly, companies that prioritize social responsibility are more likely to avoid scandals related to labor practices or human rights violations. By prioritizing ESG factors, companies can build a more sustainable business model, which can result in long-term investment success.
Reason 2: Companies that prioritize ESG factors tend to have better financial performance.
Studies have shown that companies with strong ESG performance tend to outperform their peers in the long run. One reason for this is that companies that prioritize ESG factors are more likely to be innovative and adaptive to changes in the market. For example, companies that prioritize environmental sustainability may invest in renewable energy sources, which can be a profitable business in the long run as the world shifts away from fossil fuels. Similarly, companies that prioritize social responsibility may have a stronger brand reputation, which can lead to increased sales and customer loyalty. By investing in companies that prioritize ESG factors, investors can potentially earn higher returns in the long run.
Reason 3: ESG investing can help investors manage risks in their portfolios.
By investing in companies that prioritize ESG factors, investors can mitigate risks related to environmental, social, and governance issues. For example, investing in a company with a poor environmental track record can result in financial losses if the company faces fines or lawsuits related to environmental damage. Similarly, investing in a company with a poor social track record can result in reputational damage and financial losses if the company faces boycotts or negative media coverage.
As said by Zhang from SoFi and Purview Investments in a Forbes article: “Many clients are very concerned about environmental and social problems, such as climate change leading to more and severe climate crises, gender and racial inequality, data security and privacy. They want to make sure that they don’t invest in firms that exacerbate or contribute to these problems and would rather invest in those that are champions in leading ESG movements.”
By investing in companies with strong ESG performance, investors can mitigate these risks and potentially earn higher returns in the long run.
Reason 4: ESG investing can lead to a positive impact on society and the environment.
By investing in companies that prioritize ESG factors, investors can support companies that are making a positive impact on society and the environment. For example, investing in a company that prioritizes environmental sustainability can help reduce greenhouse gas emissions and promote a more sustainable future. Similarly, investing in a company that prioritizes social responsibility can promote fair labor practices and human rights. By investing in companies that prioritize ESG factors, investors can align their investments with their personal values and make a positive impact on the world.
In conclusion, companies that prioritize ESG factors tend to be more sustainable, have better financial performance, and help investors manage risks in their portfolios. ESG investing can lead to a positive impact on society and the environment. As more investors seek to make socially responsible investments, ESG investing is becoming increasingly relevant in the financial industry. By investing in companies that prioritize ESG factors, investors can potentially earn higher returns in the long run and make a positive impact on the world.
At Storm4, we strive to partner with startups paving the way for ESG. We support scaling their teams to meet their mission of a decarbonized future. If you are experiencing growing pains, get in touch. Our ESG recruiters connect leaders with professionals across Engineering, Data, Product as well as Sales and Marketing.