ESG stands for Environmental, Social, and Governance factors that set the criteria to rate companies according to their traditional financial measures. ESG investing is not a new concept. In the 1960s, investors started excluding stocks from companies involved in unsustainable business activities like tobacco production. Today, investors have become more focused on prioritizing ethical considerations while making their investments.
ESG investing captured $51.1 billion in 2020, and it has been setting new records since then. The global ESG investment assets are expected to reach $53 billion by 2025. Such a potential growth raises a critical question: what’s driving the ESG trend? The advisors need data-based ESG research solutions to understand the key drivers based on which they must respond.
What is ESG Investing?
ESG investing refers to investing in assets with a high ESG rating selected according to their influence on the environment, society, and governance. These include factors like gender representation, executive pay, carbon intensity, etc. ESG research plays a crucial role in analyzing these variables and helping investors finalize their decisions.
Key Drivers of the ESG Trend
ESG investing considers ESG factors that most investors know but do not fully understand. Understanding the most influential vital drivers is crucial given its rapid growth rate. Only then one can figure out why both institutional and retail investors have adopted this trend.
Consumer Preferences and Attitudes: Consumers have become more conscious about the environment. Therefore, they demand more sustainable goods and services and are willing to pay more for them. The industries of eco-friendly fashion, sustainably packaged goods, and alternative plant and meat-based foods have witnessed massive growth rates. Advisors respond to these consumer preferences and attitudes by altering how companies produce, distribute, and sell.
Social and Environmental Goals: Policymakers have set social and environmental goals with a commitment to zero carbon emissions to diminish global warming. As renewable energy becomes more affordable and the preferred choice of consumers, companies relying on fossil fuels will find it challenging to adapt. Therefore, companies that are open to the ESG change get lucrative opportunities in the sector.
Green energy benefits the entire ecosystem, including transportation, electrification, and storage. For instance, innovations like e-vehicles have seen impressive consumer acceptance and growth rates.
Proper Governance Needs: G plays a crucial role in ESG research and development. Proper governance mitigates the risk of fraud, negligence, and poor management, all leading to a negative impact on future profits. Advisors need to focus on longstanding inequity to diminish societal disparities and inequality.
The regulatory environment across the globe is changing at a rapid pace. Many countries have shifted focus to ESG requirements in their latest regulations and promoted ESG issues. Various entities are involved in the process, including regulators, governments, consumers, businesses, and capital markets with green innovations and technologies support. Considering this, many advisors have shifted their focus from shareholder returns to factors like the company’s impact on climate change, flood risk, data security, privacy, sea levels, and demography.
Over the last few years, ESG research has affected the investment landscape to a great extent. Net flows, product launches, and AUM of sustainable products have increased, highlighting the growth in the ESG space. So, it’s crucial to get support from research experts to make informed investment decisions to grow business and contribute to the ESG simultaneously.