Key Terms

KEY TERM: ESG Investing

Investing which prioritizes optimal environmental, social and governance (ESG) factors or outcomes. ESG investing is widely seen as a way of investing “sustainably,” where investments are made with consideration of the environment and human wellbeing, as well as the economy. It is based upon the growing assumption that the financial performance of organizations is increasingly affected by environmental and social factors.

KEY TERM: Sustainability

The ability to maintain or support a process continuously over time. Sustainability seeks to prevent the depletion of natural or physical resources, so that they will remain available for the long term.

WHAT IS ESG?

ESG investing refers to assets that are selected according to their environmental, social and governance factors.

These include everything from carbon intensity and gender representation, to executive pay. Often, these variables are analyzed through sources such as sustainability reports or government data, among others.

WHY IS INTEREST IN ESG & SUSTAINABILITY GROWING

The world is changing!

Global sustainability challenges such as... • Demographic changes • Flood risk and rising sea levels • Extreme weather • Social justice (such as Black Lives Matter) • Privacy and data security • Covid-19 • Political climate • Pressure from investors • Regulatory bodies (rules from companies, industries or governments)

…are introducing new risk factors for investors that may not have been seen previously. As companies face rising complexity on a global scale, investors are reevaluating traditional investment approaches.

The economic pressure from the COVID-19 pandemic challenged some industries and companies’ exposure to ESG risks and their ability to manage them. Companies are facing increased complexities and a higher amount of scrutiny if they are not adequately addressing ESG or climate risk.

A NEW GENERATION OF INVESTORS

The interest from millennial and Gen Z investors around the world has helped drive the rapid growth in ESG investment. These new investors want to invest their money in socially responsible investing and will avoid investing in companies that they don’t believe are serving the best interest of society or the planet.

BETTER DATA AND TECHNOLOGY FOR MORE MEANINGFUL INSIGHTS

The growing interest of ESG investing has led many companies to publish sustainability reports alongside their normal financial reports (which show how the company is doing and if it is on track with their goals). However, these sustainability reports can often be accused of “greenwashing.”

(www.thesustainableagency.com)

Improved technology and artificial intelligence (AI) has allowed for increased transparency within ESG data and the impact that companies have on society and the environment. Advancements in technology and AI, combined with the internet and social media, have allowed for more reliable data for investors and, in turn, increased the power of investors.

Can you brainstorm any other factors that may contribute to the ESG investing boom?

During the next session, we will begin to look at how environmental, social and governance factors can impact the stock market and investment performance.