Why is ESG Important?
A growing number of investors are seeking out to purchase stocks of companies that go beyond granting financial returns and investing into companies that are also taking a part in making the world a better place.
Environmental, social and governance investing (ESG) takes ethical considerations into financial investing and is the conscious decision to invest in companies making positive impacts.
In a survey conducted by Morgan Stanley, 75% of individual investors reported interest in socially responsible investing, and by 2019, the number had increased to 85%. To confirm, we dug deeper and uncovered that “esg investing” was a keyword that Morgan Stanley and other financial institutions were in fact paying for.
Growth is likely to continue as younger Millennials, 95% of whom expressed interest in socially responsible investing, become more prominent investors. According to a report by Ernst and Young, Millennials are predicted to receive more than $30 trillion of inheritable wealth. Socially responsible investing involves a wide range of issues, and describes investments in companies that score highly on environmental and societal responsibility scales.
A company’s ESG score is determined by a third-party researcher in the following categories: environment, social, and governance.
Environmental considerations can be a company’s carbon footprint, use of renewable energy sources, toxic chemicals used within production and outside environmental actions taken by the company, such as donating a certain percentage of profits to approved sustainability organizations.
Social issues examined may include diversity within the company, from hiring practices to executive members. Social impact should ideally extend beyond the workplace with companies seeking to support the outside community at large. With a wide variety of possible causes to support, community impact can include assisting foster youth, veterans, and people struggling with food insecurity.
Considerations within governance look at the operation of a company’s board and management and evaluate diversity in leadership and executive pay. In 2020, ESG investing made up 33% of total U.S. assets under management.
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