Environmental, Social, and Governance (ESG) Investing: Trends and Implications

Published on: June 24, 2024

Long gone are the days when investing was only about financial returns. While it’s true that returns are still an important aspect of investing, the reality is that more people are focusing on the ways in which investments can contribute to the betterment of society as a whole.

Enter environmental, societal and governance (ESG) investing. This is a relatively new concept that strives not just for profitability, but for positive societal change and a greater sense of social responsibility.

Whether you’re already in the finance field or have plans to enter the industry, understanding ESG investment strategies and how they can contribute to financial sustainability is a must.

ESG Investing Trends

ESG investing has been gaining traction for several years, especially among private equity firms and larger companies. In fact, during the COVID-19 pandemic, ESG investing reached peak levels and some speculated that it would be no more than a passing trend. However, several years later, it has become clear that ESG investing is here to stay.

So, what are some of the trends that finance professionals should be aware of in the coming years? One notable trend that we will likely see is that of an effort to reduce emissions related to the global supply chain. Specifically, businesses will be looking to reduce their carbon footprints through such improvements as carbon-tracking technology. However, these improvements will require substantial infrastructure changes and thus investments from outside sources.

As more governments and large businesses move toward goals to reach net zero emissions by 2050, it is also likely that we will see increased ESG funding and investments to work toward these goals. Most likely, this will involve additional investments toward green infrastructure improvements.

These are just some of the ESG investment trends that we can expect in the coming years, but you can find out more about these and other predictions in this AlphaSense article.

ESG Reporting Standards

It is also worth noting that reporting standards and regulatory frameworks related to ESG are changing. That said, investors and other finance professionals need to be prepared to stay on top of these changes and remain in compliance as much as possible.

Reporting standards for ESG investments are being established throughout the United Kingdom, the United States and beyond. In the United States, these regulations do not exist at the Federal level but are the responsibility of individual state governments to implement and enforce. Still, many states across the country have begun creating their own rules and reporting amendments to provide more consistent information on ESG factors.

In the UK, there are currently two mandatory disclosure laws related to ESG investing. Both were passed in April of 2022 and cover issues related to climate financial disclosures and limited liability partnerships. More specifically, these laws stipulate that UK companies meeting certain criteria must include climate-related financial disclosures in their strategic reports.

Only time will tell what additional regulations and reporting standards may come for ESG investors in the future. However, it is likely that if ESG investing continues to grow in popularity, more governments will implement their own regulations and reporting requirements in the coming years.

ESK Risk Management

As with any type of investing, risk management is an important aspect of ESG investment opportunities. Precisely, financial risk management in ESG investing requires assessing different types of risk (such as operational risk and market risk) to mitigate uncertainty as much as possible.

What are some of the specific risks involved with ESG investing? There are many to consider, with climate risks being among the most notable. Physical risks such as rising sea levels and water scarcity are common issues that investors must take into consideration when making decisions. This includes conducting a climate risk assessment and looking closely at sustainability metrics before making an investment decision.

Meanwhile, regulation risks must also be mitigated as much as possible, especially as more legislation regarding ESG investing and reporting requirements continues to be passed.

Social risks are yet another important consideration in ESG risk management. More than ever, people are concerned about such social issues as safe working conditions, fair pay and human rights. All of this must be considered and mitigated to make the most sound investing decisions possible while following ESG due diligence standards.

ESG Data and Analytics

Another important aspect of successful ESG investing is that of data and analytics, especially in recent years when this area of investing has seen such incredible amounts of growth. Interestingly enough, a Greenly.com article notes that “numerous studies have established a positive correlation between ESG investment performance and financial growth.” In fact, successful ESG investments can yield incredible results without requiring large up-front investments.

The key, of course, is finding and taking advantage of the right opportunities at the right time. This requires a solid understanding of data and analytics best practices, as well as a strong grasp on the global market.

ESG Ethical Investing

Ethical investing is a critical part of ESG investing, with issues such as human rights, child labor, living wages and worker safety all at the forefront of many investing decisions. In deciding whether to invest in a particular cause or business venture, investors must look closely at social factors to ensure that workers are being properly cared for and that their data is being protected. Meanwhile, other social factors such as stakeholder engagement and community relations must also be considered.

In addition to social factors and social impact bonds, ESG investors must also look at such governance factors as:

  • Board composition
  • Executive compensation
  • Code of conduct
  • Tax strategy
  • Instances of corruption, bribery or other ethical issues

Another vital aspect of ESG investing, of course, is the environment. With this in mind, investors must consider some crucial environmental factors when performing their due diligence. Some examples of these environmental factors include:

  • Energy efficiency initiatives
  • Greenhouse gas emissions
  • Pollution
  • Biodiversity protection
  • Waste management processes

Challenges and Opportunities in ESG Investing

ESG investing is undoubtedly seeing a great deal of momentum, but this isn’t to say that there haven’t been some challenges as well. This is especially true when to take into consideration the lack of standardized metrics and reporting across the board, which can lead to problematic inconsistencies. This only reiterates the importance of ESG due diligence and the ability to look closely at ESG data and analytics to gain valuable insights.

Another potential challenge for investors to keep in mind when exploring ESG opportunities is that of greenwashing. Specifically, greenwashing occurs in a situation where green/ESG efforts are exaggerated by companies or organizations to bring in more investors. When this occurs, investors can end up losing out on profits while failing to reach suitability, ethical and other goals. Ultimately, the best solution to greenwashing is a combination of increased ESG due diligence and greater transparency requirements across the board.

The Future of ESG Investing

While nobody can predict the future, it is fairly safe to say that the focus on ESG investing isn’t going to wane anytime soon. As more consumers commit to supporting businesses and initiatives that benefit society and the environment, investors will find that funding these causes can pay off in many ways.

At the same time, it will be interesting to see what the next several years hold when it comes to regulations and reporting requirements. This is especially true as more governments continue to create and implement their own laws. These regulations will, in turn, inform how investors handle their own reporting, due diligence and investing strategies as a whole.

Ultimately, there is every reason to be hopeful that ESG investments can be just as profitable for investors’ bottom lines as any other type of investment. To add, they can make a positive change in the environment, social/human rights and governance issues.

Advance Your Education With a Finance Degree

If the last few years are any indication, the popularity of ESG investing will only continue to grow in the coming years. This is especially likely as more consumers continue to make more sustainable lifestyle choices, purchases and investments themselves. With a solid understanding of what ESG investing entails and how to follow crucial ESG compliance standards, finance professionals can pave the way for a better future while maximizing returns.

Ready to take your finance expertise to the next level and potentially be part of the next generation of ESG investors and difference-makers? Park University is proud to offer finance degree programs at our Kansas City area campus centers, Parkville campus, Gilbert campus or even online for your convenience. These programs are specifically designed to cover important industry topics, ranging from financial reporting and ESG risk management to analytics and more. You can learn more about any of our degree programs by getting in touch with our team to request information.

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