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Five Reasons Why ESG Investing Is Crucial For Investment

Summary

• ESG investing involves evaluating companies based on environmental empathy, social responsibility, and overall governance.

• ESG investing has become a crucial metric in today’s times when global organisations are striving to promote a sustainable and ethical work culture.

The world of investing is a dynamic arena that witnesses constant development in terms of influencing trends. One such trend shaped by the growing acceptance of climate change goals worldwide is ESG investing. For the uninitiated, ESG is a metric that measures the overall impact of an investment based on three parameters - Environmental Empathy, Social Responsibility and Governance.

In modern times, investing is no longer just a game of evaluating companies’ financial soundness but instead has been augmented with an additional parameter that caters to environmental and societal objectives. Investors are increasingly embracing ESG investing, which requires them to pick such profitable companies that achieve their financial goals while fulfilling their environmental responsibilities.

In a nutshell, ESG has allowed investors and financial experts to dive into the world of investing with a mindful approach. It has further fabricated a conscious culture among companies, urging them to improve their ESG scores while attracting investors.

GOOD READ: Which sectors are more sensitive to ESG?

Having said that, let us discuss few enticing reasons that make ESG investing crucial from the investment standpoint:

Pushing the agenda of climate change

At a time when leaders across the world are striving for global awareness on the issue of climate change, ESG seems to be a perfect wake up call for financial market players. Even as climate change gains global recognition, companies still sometimes turn a blind eye to the topic and often prioritise revenue generation over the same.

ESG investing incentivises companies to look at climate change as an external issue and a factor influencing their prevalence among investors. Thus, it is considered as a great investment vehicle promoting broader environmental goals that are the need of the hour.

Promoting energy-efficient technology

As companies compete to reach the top of the sustainability ladder, increased research and development would be required to find innovative solutions to cope with the existing problem of climate change. One such solution is energy-efficient technology, which could foster a smooth transition from environmentally harmful production methods to safer and tactful production practices.

ESG investing could promote such energy-efficient technology by bringing the creativity and innovation of the companies to the table. In addition, it encourages firms to embrace efficient production tools and succeed in the journey of becoming sustainable operations.

Moving in tandem with changing global trends

ESG investing is a prime example of how global attitude is reflected in the stock markets and the behaviour of investors. Global sentiment regarding climate change has greatly altered the investors’ vision, urging them to be more conscious in this field of investment.

Thus, companies who choose to opt-out of the ongoing global trends have become more prone to losing out on potential investments from market players worldwide. However, ESG investing leaves little room for businesses to take the risk of not implementing ethical practices.

For instance, big corporations employing cheap foreign labour to save up on costs or having a poorly governed structure are more likely to come under the scanner in the era of ESG investing. Such corporations could lose out on market participants, and certainly, no organisation would like to take this risk.

Setting a new foundation for start-ups

With the rise of ESG investing, investors usually prefer to keep an eye on those companies that think outside the box. Companies that go beyond just the conventional mindset and harbour holistic work ethics hold the potential to overtake large corporations through ESG investing. While embracing ESG investing, many smaller and less recognised firms could find themselves at the top of the leaderboard in the investing dome.

Additionally, firms set to enter stock markets could use the ESG investing sentiment to their advantage by structuring their organisation around these goals. By accurately implementing the fundamentals of ESG, small firms could earn a reputable position even in a market with seasoned players.

Branding companies in a manner that resonates with people

In the age of social media, the role of employer branding has become increasingly apparent. Reports suggest that millennials, i.e., those born between 1981 and 1996, give high weightage to how well a company performs in terms of sustainability and other related goals.

ESG investing provides companies with easy access to good Public Relations (PR) and favourable press, both of which are crucial parameters affecting how a business performs financially. As consumers become progressively more acquainted with a product’s back-story, they try to assess it based on various ESG related aspects. Thus, companies that fulfil ESG goals are better positioned to maintain a good image in the public eye.

In a nutshell, ESG investing has emerged as the modern investor’s handy analysis tool that holds the potential to make businesses competitive and holistic in its approaches. This investing technique may soon alter how businesses and investors view success in the financial world.

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