ESG: Investing for a Greener Tomorrow
When you think about the people working for a better, more sustainable future, you are likely thinking of a protester holding signs in the streets, or a zero-waste lifestyle enthusiast busily making their own products rather than using anything in a plastic container. What you probably don’t think of are people in business suits discussing stock market trading or people worth seven figures going over their investment portfolios with their financial advisers. But as sustainability grows to be the most important issue on everyone’s mind, especially as the very progressively-minded millennial generation comes into their own, environmental, social and governance investing has been rapidly ballooning. Furthermore, these investments are matching and exceeding expectations everywhere with no sign of slowing down. So today we’re going to explore the world of sustainable investing, so you can see how going green is the future of making green.
Environmental, Social, and Governance investing, or ESG for short, is the hottest new trend these days. The idea is to incorporate ESG development goals into you evaluations of investment decisions, integrating them into more traditional ways of evaluating a stock, so that the investor knows that their money is actually building positive development for the world while still generating capital. ESG investing will look at a broad cross section of socially responsible practices, including a companies carbon impact measurements, employee treatments, recycling and circular economy initiatives, ethical sourcing, and corporate transparency to understand how much overall good the company is actually doing for the planet and the people within it.
ESG investing is tied in with the concept of stakeholder capitalism, which had its day in the sun at the 2020 World Economic Forum summit at Davos. The idea behind stakeholder capitalism as outlined in the Davos Manifesto 2020 is to reinvent the concept of capitalism to one where all of the stakeholders in a company, the investors, employees, and customers, are all considered equally important, and so success of a company involves understanding and measuring the metrics of all three groups. This seems like common sense, and the idea isn't new, but from around the 80s to now the dominant idea was Milton Friedman's investor capitalism, which argued that companies focus solely on profit for the investors are the most efficient and therefore would most efficiently benefit society overall indirectly through Adam Smith's invisible hand of the market. Unfortunately that didn't work out quite as planned, as benefiting solely the investors led to a culture of immediate profits over long term thinking, leading to disposable-everything, long term environmental destruction for quarterly profits, and workers rights not being taken seriously. Stakeholder Capitalism then is the underlying concept that informs and powers ESG sustainable investing.
The rapid rise and success of sustainable investing comes from looking at the long term. Looking at internal combustion engines versus electric cars. Cities around the world are limiting the amount of cars allowed on the road, the people are demanding better emission standards to combat smog, and electric car technology is rapidly becoming mainstream. Ford released a new, all-electric Mustang, New York City announced it the Tesla Model 3 is an approved car for their taxi fleet, California is switching to a 100% electric bus fleet by 2029, and that's all just the US. China has a staggering 421,000 electric bus fleet and that will continue to grow. Considering that once the electric infrastructure is installed these cars run at a fraction of the price of diesel and quickly pay for themselves, it’s very easy to see which engine technology is going to be more profitable long term, making the sustainable choice both a safer and more profitable investment choice.
Another area where you can see this switch over to sustainable is in the plant-based food industry. There has been something of a meteoric rise in plant-based food sales in recent years, with Forbes reporting a 31% increase in sales industry-rise worth $4.5 billion. This doesn’t seem to be a simple health fad, but rather a correction from America’s over-reliance on meat as the environmental and health impacts become clearer. Vegan food is no longer just for vegans, as there is an increasing interest in the Mediterranean diet, meatless Monday type trends, and simply more options out there that people are clearly willing to try. With Impossible Burger and Beyond Burger now being offered in restaurants like TGI Friday’s, Carl’s Junior, Burger King, and White Castle, it is clear that Americans are now embracing a variety of vegetarian and vegan options in all of their restaurants and will continue to expect more. This pattern holds up across basically all industries. Why invest in oil and coal when renewable energy just overtook fossil fuels in the UK? Why invest in fast fashion companies when Forever 21 just declared bankruptcy in large part thanks to the rise of slow fashion? The writing is clearly on the wall here.
Studies show that upwards of 65% percent of high impact investors believe that it is very important that their investments are used to help build a better world through investing in things like solar power, sustainable fashion, and other ecologically minded businesses. Unfortunately, right now there somewhat more talk than there is action in terms of the actual investments, with only around 40% of investors actually engaging in sustainable investing (although that is still huge). The United States and the UK are the biggest culprits here, as they only have 12% and 20% of their investors engaged in sustainably minded investing respectively. But the good news is that the barrier to sustainable investing seems to be mainly just an education problem. The same study that discovered this gap between investor talk and practice also show that the majority of investors believe sustainable investing will continue to grow, overtake traditional investing given enough time, and become the new normal.
These days ESG investing is more than just a strategy to talk about with a financial adviser, as entire companies exist to insure your dollar does the best for the planet it can. Companies like Earthfolio, OpenInvest, and Green Century Funds are investment firms that exist entirely to provide customers with easy to use platforms for investing in sustainable companies. This way, everyone from high money investors to everyday people investing for retirement can all be a part of the movement for greener finances. As more people learn the jargon behind ESGs and come to trust both the sustainable promises and the investment returns, sustainable investing is only set to grow.