ESG refers to Environmental Social and Cooperate Governance which are the three factors around which an investment decision revolves around when a company adopts a ESG strategy in order to help determine the character of the company’s future performance. ESG is a prominent investing philosophy within the stocks investing realm, seen as a sustainable option through which environmental social and cooperate governance issues are taken into consideration when investing.

The environmental component is considered through research that evaluates both the negative and positive environmental aspects of a company, reviewing a number of areas such as the carbon footprint and intensity of the company, water usage, conservation,  responsible waste disposal, recycling practices, usage of renewable energy and energy efficiency, the environmentally friendly aspects of the company’s product (if any), the climate change policy and plans of the country the company is situated in and the companies relationship with environmental regulators in their country. Generally, companies that comply with standards set by the Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI) are considered environmentally sustainable. For example, Nike is a company that meets ESG criteria and they are part of a coalition of various companies called RE100, who have pledged to source 100% renewable energy across its operations by 2025. 

ESG has been popularised in the financial sector due to its ability to reduce long-term risk as Stakeholder treatment issues including climate change and resource scarcity pose serious risks to all companies' operations and profits especially with globally changing environmental policy to cater for climate change, sparked by The Paris Agreement in 2016. Environmental challenges have the power to ruin entire economies through the increased scarcity of resources leading to higher prices, more frequent natural disasters, increased poverty which may result in political instability and social unrest. This has already been observed in the case of PG&E (Pacific Gas and Electric Company) who went bankrupt partly due to the wildfires which were aggravated by conditions that arose due to climate change. With such high risks at stake, many companies are participating in ESG investment options to mitigate future downfalls.

ESG companies have also enjoyed the fruits of their labour despite the covid-19 pandemic with the S&P 500 ESG index, ( which considers large companies in the US who attain high ESG ratings) transcended the standard S&P index by 0.6 per cent.  BlackRock which is an investment management company has also calculated that 88% calculates that 88 per cent of “a globally-representative selection” of sustainable indices outperformed their non-sustainable peers in the first four months of 2020. Although this success may be attributed to the drastically decreased demand for oil and an energy slump during the pandemic, Blackrock estimates that this only accounts for a small fraction of the outperformance. A big reason that ESG is more resilient is the fact that it encourages better supply chain management and cooperate governance, with more frequent audits and analysis of supplier relationships required to meet ESG standards enabling companies to obtain necessary information to better respond to economic shocks.

The International Energy Agency has warned that there is likely to be slower transition to clean energy sources to the economic recession caused by the pandemic. Therefore, long term green energy policy should be enforced with ESG investing being encouraged so that we may achieve the goals set in The Paris Agreement. In fact, debates in Europe and Korea are deliberating the inclusion of Green New Deal initiatives in post-pandemic recovery plans

References:

https://www.cfainstitute.org/en/research/esg-investing

https://accessfinancialplanning.com/the-benefits-of-esg-investing-especially-now/

https://www.fool.com/investing/stock-market/types-of-stocks/esg-investing/

https://www.ft.com/content/1cfb5e02-7ce1-4020-9c7c-624a3dd6ead9

https://www.ft.com/content/9e3e1d8b-bf9f-4d8c-baee-0b25c3113319

https://www.esg.adec-innovations.com/about-us/faqs/what-is-esg-investing/#:~:text=ESG%20(Environmental%2C%20Social%20and%20Governance,the%20performance%20of%20the%20business.