ESG stands for environmental, social, and governance. So, what is ESG investing? It is a holistic approach to investing that incorporates critical factors into investment analysis and decision-making. Basically, it’s a metric to inspect a company on how their business impacts the environment, how they treat their employees, suppliers, customers, and how they deal with legislation.
Why is ESG Investing on the Rise?
People are becoming more aware of environmental crises happening. Now with the pandemic, sustainability is the trending keyword. Millennials and Gen-Z have entered the economic arena with a broad perspective and knowledge of social and environmental impacts. In 2015, the United Nations adopted their 2030 Agenda for Sustainable Development, a blueprint consisting of 17 Sustainable Development Goals (SDG) to end poverty, improve global health and education, and spur economic growth while tackling climate changes.
This becomes the entry of ESG investing in rising to the top. Companies everywhere began their initiatives to comply with the ESG standards in a bid to attract more foreign investors. The government has also enacted new measures to promote ESG growth. As for Malaysia, Muhammad Umar Swift, CEO of Bursa Malaysia, has stated that ESG assets performed better than non-ESG assets. In addition, Malaysia aims to become ASEAN’s leading, sustainable and globally-connected marketplace.
The rise of the internet and data analysis also boost the public’s need for ESG products. Compared to years prior, it’s easier now to track ESG, thus paving the way for better comprehension of ESG investing. However, this also means that the ESG investment landscape will keep growing, and investors must act fast to maximize their profits.
The X-Factors Driving ESG Adoption
Deutsche Bank has forecasted that ESG-based investing will exceed the $100 trillion mark in less than a decade. ESG is here to stay, and as an investor, you should go where the market is. Still don’t buy it? Here are the x-factors that make ESG more appealing than traditional assets.
Unfortunately, the earth is not getting better. Nations race to meet their goal of zero-emission, and to be on top; companies must also commit to reducing greenhouse emissions. Investors know to pick companies that focus on moving forward. In the renewable energy age, investors would surely lean more towards environmentally-conscious companies.
The S in ESG stands for social factors. Companies that are winning the market must be aware of their public persona. With social issues like racial injustice, sexism, classism, and many more, investors focus on socially “woke” companies. The shift is tremendous, as we can see in the United States, where big names like Nike and Unilever proclaim their support for social movements. And brands who fail to do this face criticism from the public, sinking their stock values.
ESG assets have repeatedly proven that they perform better than non-ESG assets. According to the Economist Intelligence Unit (EIU), 74% of 450 global institutional investors reported that their companies’ ESG-integrated investments had outperformed their equivalent traditional investments. In the same study, 75% of the investors commented that the pandemic could increase the public’s appetite for ESG investments for the next three to five years.
ESG Investing in Malaysia
As mentioned before, Malaysia is driving towards ESG-based investing. Even more so, Malaysian local institutional asset managers such as Khazanah Nasional, Employers Provident Fund (EPF), and Retirement Fund (Incorporated) – KWAP signed the United Nations Principles for Responsible Investment in 2019. These Malaysian institutions have incorporated ESG into their fund management.
However, Bursa Malaysia admits that they should focus on educating small and mid-level businesses about sustainability and the benefits of adopting ESG. Rather than an obligation, companies should see ESG as a strategy to stay relevant and become more relevant.
ESG standard gives you the green light while searching for a new potential investment opportunity. On the bright side, ESG can also act as a filter to help you avoid companies that signal several risk factors—as business owners, assessing your business from an ESG standpoint can benefit you in the long run.
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