Environmental, Social, and Governance (ESG) Investing
This article is an excerpt from the Sept-Oct 2021 edition of the Finance Gazette Volume III. Click to read the whole edition
ESG investing, also called socially responsible investing or sustainability, is a type of investment that seeks to mitigate and even benefit from environmental, social and governance risks.
The first wave of ESG investors was limited to those with a high net worth who had focused on traditional investments for their income streams. The problem with this is that these investors may not have been as successful as they might have liked due to human-induced climate change. The second wave started in the early 1970s and sought to minimize risk while maximizing potential return on investment. This group was more focused on socially responsible investments, such as environmentally friendly ones. The last wave started around 2001 and sought to add an array of social, environmental and governance concerns to their investment decisions in order to prevent negative impacts on the Earth.
The first wave was largely made up of individuals with a high net worth and maximum income stability who were seeking a return on their investment (ROI) through interest and dividends while minimizing risk. They were not concerned about environmental or social issues.
The last wave is made up of individuals with a wide range of assets and investments who are seeking to be proactive about climate change, social justice, natural resources and other issues through the use of their existing investments. They are making profit through profit-sharing, or by achieving higher returns on their investments by reducing risks.
The main thing that this final wave has in common is that they are seeking to address ESG issues broadly by reducing risks. This preoccupation with risk-reducing strategies has led them away from traditional investment strategies (the first wave), which can fail to mitigate these same risks.
ESG investing has been said to have been introduced as a term by the Global Sustainable Investment Alliance in 2008. However, the term socially responsible investing appears as early as 1991. In 1991, the field of socially responsible investing encompassed around US$398 billion in assets under management.
Social investment has been practised throughout history. In fact, Aristotle is quoted as saying "the gods sell us all good things at the price of labour." Social investment continued into the colonial times and was common among British colonials who wanted a return on their investment while maintaining a minimum level of social responsibility. Colonialists would invest in tobacco plantations, for example, but would not allow slavery on their lands.
Recent years have seen a significant expansion of ESG around the globe as individuals and even large companies increasingly recognize the interdependencies between social, environmental, and economic issues. The COVID-19 pandemic encouraged this trend notably. The serious toll on the market conditions caused by the pandemic in 2020 led many investors to turn to ESG funds for increased resiliency. In fact, the first three months of 2020 saw $45.6 billion USD flow into these funds globally.8 $30.7 trillion currently sits in sustainable investment funds worldwide, and it is predicted this could rise to around $50 trillion in the next two decades.
Therefore, ESG was the applauded history, the much-needed present and the utmost desired future.
Author: Aarushi Agarwal
Illustration by: Harsh Agarwal