WHAT IS ESG?
ESG is Environment, Social, and Governance criteria that represent some risk in your stock or bond investments. When you purchase a stock, you are buying a stake or equity in a company in exchange for cash. When you buy a bond from a company, city, or a government, you are buying their debt in exchange for fixed payments to you. Either way, you want to make a sound and profitable investment—you want to weigh in all types of risk before your purchase of a stock or bond.
TRANSLATING ESG INTO METRICS TO MEASURE
ESG criteria need to be measured, estimated, and integrated into sound metrics. These metrics, in turn, help you weigh your risk. For example, floods, tornadoes, and heat waves represent some growing Environmental risks, while gender diversity or pay equity or social inclusion represents a Social risk. Lastly, the corporate Governance in terms of executive compensation, and the company’s board can translate into some risk as well. Typically when making an ESG risk assessment, there is uncertainty in choosing which types of factors may come into play in an investment. For example, air pollution impact would be much more important for a manufacturing company than for a technology company.
ESG & INVESTMENT OUTLOOK
Many recent studies show a positive correlation between ESG and performance of stocks and bonds. Social media and newsfeeds on consumer phones heighten consumer awareness of ESG, driving investor interest. We anticipate that ESG criteria in investments will only continue to grow. According to a recent report, investors held $11.6 trillion in assets selected according to ESG criteria at the beginning of 2018, up from $8.1 trillion just two years earlier, an increase of 30%.
WHO IS DRIVING UP THE ESG INVESTMENTS?
According to published industry reports, millennial generation and women are driving up ESG investments to $15 trillion and $20 trillion into U.S.-based ESG investments in next two to three decades, nearly doubling the size of the current U.S. equity market.