ESG investing

ESG investing 

Today’s conscious investors are looking for businesses with a sustainable foundation.  Companies that can withstand the worst effects of any crisis and consistently factor in the environment, society, and governance (ESG) are in high demand. ESG investing prioritises the ESG variables or outcomes when making investment decisions. 

What is ESG investing? 

ESG, is a framework which businesses use to evaluate their sustainability. Environmental considerations centre on ecological protection; social considerations examine how a company treats its employees and the community; and governance considerations examine how a corporation is administered.  

After considering ESG factors, ESG investing assesses an investment’s financial returns and overall impact. An investment’s ESG score measures the sustainability of investment in those specific categories. 

Understanding ESG investing 

Companies that adhere to sound ESG principles are the focus of ESG investing. ESG is an exciting growth sector with good consequences for society and the environment, as investors are becoming keener to align their portfolios with ESG-related companies and fund providers.  

With the concept becoming a crucial component of many institutional investors’ playbooks, ESG is now mainstream. A rising number of ESG rating agencies issue ESG ratings, as well as new and developing reporting formats, all of which enhance the transparency and consistency of the ESG information that corporations disclose publicly. 

How does ESG investing work? 

For ESG investing, a company’s environmental disclosure, environmental effect, and any measures to reduce pollution or carbon emissions are considered ecological factors. Social relations relate to management, diversity, and human rights prevalent in the workplace. This also covers any connections to the neighbourhood, such as philanthropy and corporate citizenship.  

Conversely, governance considers the relationship between the management and shareholders and shareholder rights and compensation. An organisation can sustain strong credibility or reputation by implementing sound ESG practices. Also, it has a lower risk likelihood because sustainability is one of their guiding principles. As a result, the company experiences consistent and longer-lasting performance over time.  

On the other hand, organisations who do not follow ESG priciples,  can suffer the long-term danger of instability, high risks, and a greater chance for unexpected losses. One-fourth of all professionally managed assets globally are in the ESG category. 

Advantages of ESG investing 

ESG investing

The advantages of ESG Investing are: 

  • As an investor, you might feel more at ease investing in businesses that share your personal beliefs, such as those that give high importance to sustainability and social responsibility. 
  • According to some studies, businesses with good ESG policies may do better financially over the long run because they can better manage risks and seize opportunities. 
  • Through your investment, you may positively impact society and the environment by choosing companies that prioritise and have good environmental, social, and governance standards. 
  • Businesses prioritising ESG practices may be better able to handle risks, including those linked to legal issues, reputational issues, risks arising from climate change, and risks arising from other environmental problems. 

Disadvantages of ESG investing 

The disadvantages of ESG Investing are: 

  • The pool of businesses that adhere to ESG standards could be smaller than that of all publicly traded companies. As a result, investors may have fewer investing possibilities. 
  • There is no commonly agreed standard for establishing which companies are “ESG-compliant,” making it difficult for investors to compare and evaluate different investment possibilities. 
  • ESG-focused businesses might be more open and accountable to their stakeholders, which could result in better-informed investment choices. 
  • Companies may have to spend more money on additional research and due diligence if ESG factors are considered throughout the investment process, which could raise the price of investing. 
  • “Greenwashing” can occur when businesses make claims about their ESG policies but these not completely supported by their deeds and could make finding viable businesses challenging for you as an investor. 
  • Some investors might be worried that backing businesses with excellent ESG policies could lead to reduced returns. Nonetheless, research has found that organisations with good ESG practices may do better financially over the long term. It may also be challenging to weigh the benefits and drawbacks of various investment possibilities from an ESG perspective if you are a novice investor unfamiliar with this kind of investing. 

Frequently Asked Questions

Sustainable investing and ESG differ because ESG may be quantified using established environmental, social, sustainable development, and governance measures. 

Several financial institutions have recently released ESG evaluations and scoring systems to identify ESG investments. For example, MSCI has released a rating system that covers more than 8,500 firms globally and assigns them letter grades and scores based on how well they adhere to ESG norms and activities. 

ESG is crucial to businesses because it assesses a business’s final value for certain objectives and establishes whether it aligns with an individual’s or other business’s values. 

 

Investors can compare a company’s performance to its rivals in the same industry and companies from other sectors using an ESG score from 0-100. Bad performance is defined as a score of less than 50, and excellent performance as a score of more than 70. 

 

ESG companies employ sustainability strategies and frequently exhibit higher operational effectiveness, cost savings, lower employee turnover, innovation, talent retention, lower compliance costs, and risk management, all of which may contribute to an increase in shareholder value. 

Related Terms

    Read the Latest Market Journal

    Financial Sectors Thriving: Top Traded Counters in April 2024

    Published on May 21, 2024 67 

    At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 67 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 69 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 20 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 105 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 104 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 59 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 133 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com