Thanks to several great technological leaps forward, it’s easier than ever to make investments in different parts of the world. Increasingly, factors like environmental and social impact, and governance, are creeping into the investment decision-making process. They’re so key for some, in fact, that they’ve got their own initialism: ESG.
What is ESG?
We can divide out the components of ESG to more accurately define what it is that we’re talking about.
Environmental factors are the things that have garnered a lot of mainstream attention thanks to climate change, habitat loss, and pollution. Any investment which results in a net increase in these things is viewed as undesirable; an investment which causes a net decrease in these things is viewed as desirable.
Social covers the impact of a business’s operations on the society in which it’s placed. An investment which compromises on labour standards, health and safety, and basic human rights, might be viewed with suspicion.
Governance is something which impacts the other two factors, as it concerns how decisions are made within the business. Factors like transparency and ownership would feature here.
What’s Ethical Investing?
While it might seem that all of the above considerations are ethical ones, there’s a stark divide between ESG and ethical investing. While ESG focusses on the ultimate financial return that will come from a given investment, ethical investing has ethical concerns as the ultimate goal.
In the long term, it’s thought that companies which perform well according to ESG standards are more likely to provide a return on an investment than those which do not. The diversity of the workforce, and of the board, often correlates with the performance of the business as a whole. The same applies to energy efficiency and practices like the living wage. Such things indicate a company that’s headed in the right direction – most of the time. It’s up to individual investors to decide whether a given company is up to the job.
If you’re investing for ethical reasons, then it might not matter whether you get a return on the investment in the short-term. You’re putting your money behind a certain promising technology, or an experimental business model with social benefits. For example, there’s an arms race at the moment for cultivated meat products, whose sale would lead to profound benefits for global farming.
Ethical concerns might differ from investor to investor; some, for example, might look at nuclear power as an environmental net benefit, while others might look at nuclear power as disastrous.
Ethical investors aren’t the same thing as charities – they’ll ultimately seek to make money. It’s just that moral factors will play into the decision as well!