Why is ESG important for investors?
An additional metric for managing risk
Many professional investors are currently using ESG metrics as a means to manage portfolio risk, identify quality management teams with sustainable business practices, and, in some cases, seek to positively influence corporate behavior.
ESG investing can help correlate an investment portfolio with a set of ethical or personal values, and help target measurable social and environmental results. Similarly, if can offer investors an analytical advantage by helping them to assess the long-term viability of a company’s business model should it experience ESG shocks at a later date.
By looking at a company’s ESG incident track record, investors can also uncover useful intelligence that could flag issues, including vulnerabilities in corporate strategy, inadequate governance structures, or poor decision making—which may impact share price. Therefore, incorporating ESG risk analysis into research is an important tool to understand the true value of an investment, mitigating risk, and identifying new opportunities.
From a financial point of view, evidence suggests that companies with better ESG records generally have better financial performance than those with worse ESG records, while portfolios that integrate ESG analysis into the investment decision-making process have outperformed those that don’t. Investing with an ESG mindset could also put you ahead of the game as regulators increasingly demand that companies disclose ESG risks, putting a premium on those companies that are already doing just that.
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