ESG Trends October 2021: What’s Hot and What’s Not?

Acronym for Environmental, Social, and Governance, ESG is a way for investors to access companies in which they want to invest. These investors have made it necessary to include values and ethics in their investment choice instead of considering profits alone.

ESG Trend in October 2021

Simply put, ESG criteria are a set of standards that determines where an investor invests. The criteria include the following:

• Environmental criteria: This could include a company’s use of energy, treatment of animals, waste and pollution management, and natural resource conservation. These criteria may also be useful in accessing any environmental risks an organization may face and how it can manage the risks. For instance, there could be issues associated with the ownership of contaminated land, how it handles hazardous waste, and how it complies with government’s regulations
• The Social criteria: This criterion looks at the business relationships of a company. Does the company have good relationships with suppliers that hold the same ethical values? Also, does it give a portion of its profits back to the community? Does the company encourage workers to carry out free services to the members of the community?  Does it have a safe working environment for its employees? Are the interests of stakeholders taken seriously? All these questions and more fall under the social criteria.
• The governance criteria: About this, investors may need to know if the accounting methods of a company are transparent and accurate. Also, they may want to know if stockholders can vote on vital issues. Investors may also want to be sure that organizations avoid conflicts of interest when choosing board members and they do not use political powers to gain preferential treatment.

Note that, only a few companies can pass all tests on all levels. It is up to investors to determine what’s important to them and what’s not.  

What’s Hot in ESG? 

Sustainability accounting is one of the hot topics at the moment. It refers to the system of measuring, analyzing, and finally reporting an organization’s social and environmental impacts. An organization carries out due research on each supplier most especially in terms and sustainability.

Here is another trending topic in ESG – more Private Equity firms now automate the collection of ESG data from their portfolio companies. 

Getting accurate information has been a big challenge for Private Equity firms. They also have a problem of getting a simple method of including the metrics of ESG criteria in their strategy. This is why the firms have moved towards using an automated process. 

What’s Not Trending in ESG?

Investment companies that don’t use ESG looking for alphas aren’t so hot at the moment. 

Although people believe that ESG is a source of alpha and may ultimately translate to great portfolio performance. Despite that, there are not so many investment companies not using ESG looking for alphas. 

Conclusion

In the past, people believed that ESG investments were morally motivated and not economically motivated. It’s a different story today. 

Studies have shown that companies that have good ESG practices experienced lower volatility and lower cost. They also had little to no instances of fraud, bribery, and corruption. These studies reveal that ESG investments end up being more stable and may even do better than other non-ESG companies.