The Benefits of ESG from an Investor’s Perspective (2024)

FAQs

How do investors benefit from ESG? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

By integrating ESG factors into their investment decision-making, asset managers can attract a broader range of investors and enhance their reputation. This can lead to increased assets under management and improved business performance.

Risk Mitigation: Engaging with stakeholders helps companies identify potential ESG risks and issues before they become significant problems. This proactive approach can help mitigate risks related to reputation, legal compliance, and social conflicts.

Investors actively engage with companies on their ESG performance, encouraging them to improve their practices. Here are some ways this happens: Shareholder Meetings: Investors can use shareholder meetings to raise questions about a company's environmental practices, labor standards, or corporate governance policies.

They seek out granular information about how specific ESG initiatives can be a source of growth and which risks are most material to a specific company and its broader industry—and the extent to which distinct ESG actions can mitigate those risks.

Sustainable or Environmental, Social and Governance (ESG) investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than the broader market.

In such cases, ESG engagement allows corporations to provide updated data and a more nuanced explanation of their ratings to investors. Most corporate interviewees also use ESG engagement dialogues to explain how their management of ESG issues is related to broader, strategic considerations.

ESG is important because it helps identify and manage risks, improve social responsibility, enhance long-term sustainability, meet stakeholder expectations, navigate and comply with regulations, and improve access to capital.

Key Points. Sustainable investing promotes long-term economic growth by encouraging companies to operate more ethically and responsibly. It helps protect the environment by directing capital towards sustainable practices and technologies.

Investors who consider ESG criteria can ensure their portfolios align with evolving regulatory landscapes, reducing the risk of regulatory backlash. Market Demand: The demand for sustainable and responsible investments is on the rise.

How do investors influence sustainability? ›

Under this, investors influence companies via engagement, capital allocation and indirectly. In turn, companies undertake actions (make investments) that make the world more sustainable.

The research finds that retail investors do care a lot about the ESG-related activities of the firms, but mainly if they affect the value of their investments — not necessarily with altruistic motives.

For companies and their management, the more they prioritize ESG investment and quantify how these activities contribute to shareholder value, the more they will likely attract savvy investors who want to reap that potential return.