The Emergence of ESG Investing
ESG: what does that acronym stand for? Those three letters stand for "Environmental, Social, and Governance" and signify an investment that has particular merit to investors of all ages.
A recent Morgan Stanley Bank survey found that almost 90% of millennials would prefer to have investments that suit their values. With young adults, ESG investing could become more and more of an element in investing strategies.1
You may recall how the phrase “socially responsible investing” became part of the stock market vocabulary a generation ago. Socially responsible investing (SRI) was often about not investing in certain companies – businesses whose products or services seemed distasteful to this or that investor. ESG investing focuses more on corporate behavior. Is a corporation managing natural resources sustainably? Does it treat workers well? Is its culture inclusive and diverse?
Corporate values count, perhaps now more than ever. Today, you have companies pledging to commit to environmentally sustainable practices and leadership initiatives designed to include women and members of minority groups in the C-Suite.
Some corporations now include ESG metrics in financial and annual reports. This is more than a nod to investors; it represents a trend in corporate communication and behavior. One notable ESG metric is CEO pay. Some S&P 500 firms have gotten bad publicity over the last decade for the degree of executive compensation their leaders receive, and investors are watching.
Philosophically, ESG investing asks two questions. An ESG investing proponent's answers may differ significantly from those of an investor uncompelled by the ESG approach.
One, should social responsibility matter more than a company's financials when you are considering an investment? Two, can positive environmental and social news about a corporation influence its stock's value more than its earnings and guidance?
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1. Corporate Finance Institute, February 24, 2021