What Is ESG Investing and Why Is It Important To Consider?

ClimateAngels | Aug 21, 2023

If it makes sense to grow your money while also helping others grow and keep planet Earth healthy, welcome to the world of ESG investing.

Before going any further, let’s learn a bit more about investing if you’re a newbie. However, the goal of this blog post is to help you learn and understand about how to invest in Environmental, Social, and Governance (ESG) projects.

What is Investing in the Financial World?

Investing is buying assets (at their lowest market value) that will turn into high-return assets over time. These returns can be in the form of income payments or capital gains.

Most of the time investors prefer buying securities, stocks, bonds, commodities, mutual funds, exchange-traded funds (ETFs), real estate, and other objects that have more monetary value or have high capital gains in the short term.

But there are other spaces of investing, like eco-investing or green investing where you can start investing and worry less about losing your hard-earned money.

One of the hottest area is ESG investing. That means investing in improvement of environmental, social, or governance-related projects.

This investing space has comparatively lower risk factors and safer investment plans, plus you’re putting your money that will grow over time and help keep the planet Earth greener than we inherited it.

This also allows you to inspire others to do the same and even more of it.

Note: Gauging your risk tolerance over time and under different circumstances is the key to successfully becoming a master investor.

For example: You have higher risk tolerance if you’re okay with frequent short-term ups and downs to earn greater long-term returns. While if you’ve no anxiety for a moderate rate of return with fewer difficulties, you’ve low-risk tolerance.

Now that you’re aware of investing, let’s introduce you to the main topic of discussion – “ESG Investing”.

What is ESG?

ESG stands for “Environmental, Social, and Governance (ESG)”. These are three areas of ESG investing wherein companies strive to improve their performance. Thus, choosing to go with investing in ESG can be the best effort ever, given that climate tech companies and non-tech organizations are working tirelessly making it their 24X7 to ensure that our planet remains greener than how we acceded to it.

ESG investing aligns with ethical principles, enabling investors to channel their funds into opportunities that resonate with their personal values.

“As a global company, we are dedicated to using our scale to run a successful business while contributing positively to society and the planet”.

– Ms. Ophira Bhatia, Senior Director, India & Lead, Asia Pacific, Middle East and Africa, Corporate & Government Affairs – Mondelez International

What are the 3 ESG Pillars and how does ESG Investing work?

The three ESG pillars are E=Environmental, S=Social, and G=Governance. These key pillars are the focus of ESG investing. Together, these three key pillars provide a comprehensive framework for evaluating a company’s overall sustainability performance and its alignment with environmental, social, and ethical values and performance.

ESG investors use these pillars to make informed investment decisions that reflect their values and priorities.

Let’s explore them one by one:

Environmental (E):

This is the first pillar of ESG that helps you assess a company’s carbon footprint, energy efficiency, waste management practices, use of natural resources, pollution control, and efforts toward mitigating climate change. Companies that prioritize environmental sustainability aim to reduce their negative impact on the planet.

For example, Climate tech companies and climate tech startups. Investing in these green tech companies can bring fruitful results to your personal goals, as well as empower the efforts for achieving Net Zero emissions by 2050.

Social (S):

The social pillar of ESG looks at how a company treats its employees, customers, distributors, and communities. It considers factors like labor practices, workplace diversity and inclusion, employee health and safety, customer relations, community engagement, and social impact initiatives. Organizations with a strong social commitment prioritize fairness, diversity, and positive contributions to society.

Thus, investors must do proper research and find companies that give more weight to social responsibilities, and start with investing accordingly.

Governance (G):

focuses on an organization’s leadership, transparency, accountability, and ethical standards. This pillar assesses factors such as the composition and effectiveness of the board of directors, executive compensation, shareholder rights, anti-corruption policies, and adherence to legal and regulatory requirements. Companies with good governance practices ensure responsible management and decision-making and promote trust among stakeholders.

What are the themes of ESG Investing in India?

The themes of ESG Investing in India revolve around Environmental, Social, and Governance factors.

The Big-4 areas of focus include:

Climate Change and Environment
Human Rights and Social Justice
Corporate Governance and Business Ethics
Stakeholder Engagement

Environmental factors include initiatives to address carbon emissions, waste management, and sustainable use of resources. Social factors encompass promoting diversity, labor standards, and community development. Corporate governance emphasizes transparency, accountability, and ethical practices.

Whereas stakeholder engagement involves effective communication with customers, employees, suppliers, and communities. ESG Investing in India aims to create a positive impact on society while generating long-term financial returns.

If you’ve been thinking about investing in the ESG segment, it’s the right time to get started.

How to Invest in ESG Funds?

Before starting ESG investing funds, it’s important to consider several factors to align your investment with your values and financial goals.

Here’s a checklist of 12 things to look at before investing:

1. ESG Strategy and Focus

Understand the fund’s specific ESG strategy. Is there an alignment for your values and priorities? Figure out whether the fund focuses on certain ESG pillars (environmental, social, governance) more than others.

2. Holdings and Portfolio

Review the companies and industries in the fund’s portfolio. Do they match your ESG preferences? Check if the fund holds companies with controversies or negative ESG records.

3. Performance

Evaluate the fund’s historical performance compared to its benchmark and similar funds. However, keep in mind that past has no power over you, and it doesn’t guarantee future results.

4. Fees and Expenses

Understand the fund’s expense ratio and other fees. Lower fees can have a positive impact on your returns over time.

5. Transparency

Look for transparency in the fund’s reporting of its ESG criteria and holdings. Ensure that the fund discloses how it evaluates ESG factors and how it engages with companies on these issues.

6. Investment Process

Understand how the fund integrates ESG factors into its investment process. Research whether the fund engages with companies to drive positive change on ESG issues.

7. ESG Ratings and Scores

Check if the fund provides ESG ratings or scores for its holdings. Understand the methodology behind these ratings and how they align with your values.

8. Risk and Return

Assess the fund’s risk level and understand how it aligns with your risk tolerance. Consider the potential impact of ESG criteria on the fund’s risk and return profile.

9. Fund Manager Expertise

Research the fund manager’s experience and expertise in ESG investing. Understand their approach to managing the fund’s ESG strategy.

10. Sustainability of ESG Practices

Determine if the fund’s ESG practices are integrated into its long-term strategy. Avoid funds that might use ESG as a marketing tactic without genuine commitment.

11. Diversification of Funds

Ensure that the fund provides proper diversification across industries and sectors.

12. Suitability

Assess whether the fund aligns with your investment goals, time horizon, and risk tolerance.

Investing in ESG to Make a Positive Impact

The ESG investment strategy you want to go with is influenced by your firm’s current setup, practices, and values, along with your own and your clients’ ESG considerations. Regardless of your approach, you have the potential to build portfolios that yield both financial returns and contribute to the greater good.

If you’re curious to learn further about creating a positive impact through green investing like ESG investing? You’re free to access our purpose-driven blogs available through Climate Angles and Go Massive Earth Network.