Between global warming, political instability, human rights concerns, and high-profile corruption cases, there are many reasons for companies to start paying more attention to environmental, social, and governance (ESG) issues. First, Millennial and Gen Z consumers are more likely to favour companies with a sense of social and environmental responsibility over those that are indifferent. Second, more and more governments are passing laws to crack down on corruption, uphold human rights, and protect the environment. Companies that do not comply could face fines and other penalties. As a result, companies with a strong focus on ESG will appear more attractive to investors for several reasons.
ESG investing can help investors diversify their portfolio
Investors are always looking for ways to diversify their portfolios. Investing in different assets across a range of industries decreases the risk that their entire investment will be lost due to a sudden downturn in one market or industry. When investors consider ESG criteria in their investments, they are often exposed to new companies in different sectors or regions. Some investors may even specifically seek out companies with a strong focus on ESG initiatives for the sole purpose of adding more diverse investments to their portfolio, as these companies may respond differently to economic fluctuations than their competitors, who do not prioritise ESG initiatives.
ESG can give companies a competitive edge
Reform is at the core of all ESG initiatives. Companies are acknowledging that the way things have traditionally been done is flawed, and that changes must be made to ensure a sustainable future for the company. By default, a focus on ESG issues motivates innovation. Companies committed to ESG initiatives must adapt quickly to changing socioeconomic conditions and environmental concerns. This enables them to identify strategic growth opportunities that their competitors might overlook. Companies that show a vested interest in the communities where they operate improve their brands’ reputations and are more likely to attract loyal fan bases. These factors are all associated with sustainable, long-term growth, which makes a company more attractive to potential investors.
ESG investing can help investors mitigate risks
To successfully implement ESG initiatives, companies must be proactive instead of reactive. Focusing on ESG issues forces companies to think about the long-term sustainability of their enterprise rather than short-term profits. Most investors also think in the long term rather than the short term. Therefore, they want to partner with companies that will provide consistent returns over the next decade, not just the next quarter. Furthermore, a company that has demonstrated its commitment to better corporate governance will increase investors’ confidence that leadership and management will make informed, financially-sound business decisions in the future. These businesses attract investors because they offer more stability and, thus, better risk-adjusted returns.
ESG and the future of investing
Securing investors is already a challenge, and as technology allows even more businesses to join the global economy, the landscape will become even more competitive. As a result, companies that focus on ESG initiatives will be more attractive to potential investors because they have a greater potential for growth and more factors that mitigate the risks associated with investing.