Anyone even passingly familiar with modern investment and finance has probably seen the term ESG make occasional if not increasingly frequent appearances. While it is often painted as a largely selfless commitment to social impact and ethical investing, the practical truth is that ESG and sustainable investments are fast becoming a lucrative, risk-averse area for asset and wealth managers to branch into. Beyond the positive press and alternative appeal of ESG investment opportunities, Bloomberg predicts that global ESG assets are on track to exceed $53 trillion by 2025, representing over a third of the $140.3 billion in projected total assets under management (AUM) that year. With Europe already accounting for over half of the world’s current ESG AUMs and accelerated growth expected from both the U.S. and Asia, ESG could prove the wave of the financial future.
Are you an investor looking to expand your interests into ESG and sustainable investing? This breakdown of what ESG means and how it can better shape your financial future may be the first step towards building your own ESG strategy.
What Does ESG Mean?
If ethical investing refers to the financial practice of filtering the selection of securities and investment opportunities through a moral code, ESG investing goes one step further. By approaching corporate and investment decision-making through a comprehensive framework, ESG strategy attempts to create more defined and measurable steps towards achieving financial returns in line with social impact.
Ethical investing – and, by extension, ESG – was pioneered by religious investors. The Quakers, for example, were the first religious movement to condemn slavery by forbidding its members to engage in the slave trade, financially or otherwise. Islamic banking also has a rigid set of ethical principles to ensure all investments are Sharia Compliant.
As a modern, secular institution, ESG blends corporate strategy and financial incentives with ethical outcomes to encourage companies and individual investors to commit to sustainable goals. To give those companies a better understanding of the steps they must take towards achieving social impact, ESG strategy relies on quantifiable and actionable goals.
ESG stands for environmental, social and governance, with each letter representing a metric by which the quality of an investment (or an investment company) is assessed. According to Investopedia and McKinsey, these metrics can be broken down as follows:
Environmental Criteria
Investors evaluate corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals surrounding the investment. This can include carbon emissions and compliance with current and future environmental regulations.
Social Criteria
Investors evaluate the company, asset or fund manager’s relationship with internal and external stakeholders. This may include charitable donations, public image, employee well-being, and diversity and inclusion.
Governance Criteria
Governance may be the most obscure criterion for an inexperienced investor. It represents the internal system of practices and procedures companies use to govern themselves and their staff. Whenever a company makes strategic decisions, complies with laws and regulations or caters to the needs of its stakeholders, it requires governance to do so. Governance can include the leadership selection process and executive transparency among other things.
The Financial Benefits of ESG
The financial results of ESG strategies speak volumes to their potential, with success from global brands like BlackRock and PepsiCo creating a strong case for ESG integration.
More generally, stock funds weighted towards companies with positive ESG scores outperformed across global markets between 2017 and 2022. Much of this success has been attributed to the COVID-19 pandemic, during which ESG firms and assets were more resilient than others. According to asset management firm Morgan Stanley, sustainable funds experienced a 20% smaller downside deviation than traditional funds around the same time.
On the social axis of ESG, global venture capital and public equity firms reported significantly higher returns from investments in companies with more ethnically and gender-diverse teams. This was particularly true in the case of diverse C-suite teams, which had an average exit that was 64% higher than their homogenously white counterparts. The continued uptake of ESG investment policies has even yielded stronger internal results from a C-suite perspective, as shown in a Deloitte report. 48% of Chief Financial Officers surveyed indicated that strong ESG principles had increased customer satisfaction while enhancing their ability to attract and retain talent.
The rapid expansion of the ESG asset market has also drawn interest from the next generation of ethical investors. A 2022 study by Stamford University found that 70% of investors between ages 18 and 41 were very concerned about environmental issues. Comparatively, only 35% of older investors shared their concerns. In a 2023 study by Morgan Stanley, 77% of individual investors expressed an interest in companies or opportunities that balance market-rate financial returns with positive social or environmental impact. Over half of those investors claimed this interest had increased in the last two years.
The Social Impact of ESG
At this relatively early stage in its proliferation and regulation, the real social impact of ESG is difficult to determine. In 2022, the UK became the first G20 country to make it mandatory for its largest businesses to disclose their climate-related risks and opportunities in line with the Task Force for Climate-related Financial Disclosure (TCFD) framework. The UK has since doubled down on its initial commitment by adopting a more global baseline for climate disclosures courtesy of the International Sustainability Standards Board (ISSB).
For the most part, however, the ESG standards imposed on UK businesses have done little to highlight the overarching social impact of ESG strategy. And, while individual success stories exist, the omnipresent threat of ‘greenwashing’ – in which companies superficially co-opt socially impactful messaging and climate-friendly policies to distract from their less credible day-to-day activities – has led to understandable scepticism.
An article by the Harvard Business Review suggests that humanity will need to invest an average of $3.5 trillion annually over the next 30 years to effectively fight climate change. It also argues that many current ESG investment funds and strategies fail to deliver meaningful environmental or social impact, confusing investors with a lack of standardised reporting and auditing. A recent US study shows that over 70% of executives surveyed across multiple industries and regions reported a lack of confidence in their non-financial reporting.
While ESG and sustainable investing may be a realistic way to encourage businesses and investors to support social impact, distinguishing between genuinely ethical opportunities and empty gestures is an ongoing struggle for individual investors and external stakeholders.
Sustainable Investing with Concept Capital Group
At Concept Capital Group, we offer a truly socially impactful investment opportunity rooted in a business model that revolves around ESG principles. As a company, we specialise in assets that make a measurable ethical and social impact, allowing investors a clear, traceable link from their investment capital to its tangible influence.
Our buy-to-let property investment opportunity has been designed to use modular construction to speedily address the UK housing crisis without compromising on quality or comfort. This ensures that every house we build can serve as a permanent residence for tenants while acting as a fully passive source of reliable income for our clients.
For more information on our social impact, book a call with our team today.
