What is all the buzz about ESG investing?

I have always been an environment friendly supporter. I recycle plastics and abstain from buying things like plastic wrap or plastic food bags. I bring my own bags shopping, compost, use reusable glass containers and learn how I can get better at reducing my carbon footprint every chance I get. All of these are a good start, but for serious changes is it enough? Do they make enough of a difference in a world where we produce 380 million tons of plastic annually (50% for single use) and 10 million tons of plastics are being dumped in our oceans annually (according to Plastic Oceans an international non-profit organization)?  As shocking as those numbers are, it is not enough to motivate our world on a large scale. For this scale of change, we need money and resources. We need companies and governments to be on board and we need everybody to be doing their part. For years activists were fighting a losing battle without big players like governments, corporations, and the big banks fully on board. Not until 2015, when the effects of global warming could not be denied anymore, did we come together with a plan, internationally.

In 2015 the world came together and agreed it was time we do something about global warming and 197 countries signed the Paris Agreement. The Paris Agreement is a legally binding international treaty on climate change. This agreement was to solidify support to limit global warming to well below 2 degrees Celsius preferably 1.5. This was the first time all nations were in agreement that something needed to be done. Since then, things have been happening. Especially in the last couple of years there has been a focus on Environmental, Social and Governance (ESG) investing. 

What is ESG?

ESG stands for Environmental, Social and Governance, known as sustainable investing.  It is a way to evaluate companies on their long-term impact on society, environment and the performance of the business. 

Environmental – Climate change policies, plans and disclosures. Greenhouse goals and transparency about how the company is meeting those goals. Cutting emissions and decarbonizing.

Social- This component comprises people-related elements, like company culture and issues that impact employees, customers, consumers, suppliers and society at large. Human rights, labor standards, health and safety and meeting a company’s responsibility to its local community. 

Governance – This component relates to the strength of the of board of directors and oversight, as well as how shareholder-friendly versus management-centric the company is. 

What’s happening in ESG now?

Socially responsible and environment supporters are realizing that there has been a shift and they can make a difference by choosing where they invest their money. Governments have decided it is time to invest in research, cleantech and renewable resources on a trillion-dollar scale. Our federal Government is committing Canada to achieve a net-zero emissions goal by 2050. They are making policy changes and implementing transparency rules for companies. When Governments invest resources and money, companies cannot help but pay attention. If money is being invested into companies that are dedicated to being green and taxes are being implemented for carbon production, then companies have huge financial incentive to make changes. Corporations are also getting significant pressure from investors. Investors want to know their money is going to companies that are supporting ESG. We are also seeing the shift in large investment funds that have the power to influence the stock market by their investment choices and they are making their choices clear. January 2021, Norway’s trillion-dollar sovereign wealth fund sold the last of its portfolio of oil and gas companies. They are not the only ones. Some of the world’s largest pension and global investment houses are pulling away from fossil fuels due to the growing pressures to show they are fighting climate change. Corporations are making large commitments like Apple’s to go carbon-neutral by 2030. Car companies have made some particularly impressive commitments. GMC, Jaguar, Volvo, Bentley have all committed to producing only electric vehicles by 2030 and others like Ford are not far behind with a commitment for being all electric by 2035. 

What does all this mean for your investments?

Even if you are not sure if ESG investing is top priority for you it should be on your radar because funds in this category are preforming. “ESG funds captured $51.1 billion of net new money from investors in 2020, a record and more than double the prior year”, according to Morningstar. This year 80% of responsible investment funds outperformed the average of their asset classes and looking to the future there will be a risk involved in investing in companies that do not make the sustainable changes.