If you are an investor, it is important to be smart by focusing on companies that provide low risk and guarantee high returns. This is a long-held approach that has helped people to maximize the value of their investments while keeping the risks low, but the old approach is evolving fast as it becomes clear that not factoring in sustainability compromises the ability to achieve long-term investment goals. So, how do you invest sustainably? One of the best options is ESG investing stocks.
In this guide, we dig deeper into ESG mechanics and answer the big questions, “what is ESG investing sock?” and “how do you identify the best stocks?”
What are ESG Stocks?
ESG, an abbreviation for environmental, social, and governance, is an important concept in gauging a company’s focus on sustainability. In line with this, ESG stocks are securities from companies that put focus on sustainability or responsible operations.
The demand for ESG stocks investing has been growing over the last decade as people start appreciating that their investment decisions can help to make a difference on the planet.
More companies are also going green, but you have to carry out due diligence to ensure that only those with higher ESG scores are considered.
Myths on ESG Investing Stocks Debunked
While the benefits that come with ESG stock investing are many, as we are going to see shortly, investors are also faced with a long list of myths that can compromise the decisions they make on where or when to buy stocks of targeted companies. Here is a closer look at some of them:
- ESG Investing Stocks Produces Lower Returns
One of the common sayings out there is that "sustainable investing is good for value but not for value." It is understandable because when people go out there to buy, perhaps something organic, the cost is usually higher. However, it is completely different when it comes to stocks investing. Indeed, the opposite is true.
Studies have demonstrated that sustainable investing, call it ESG investing, always delivers higher and not less returns to investors. In one of the studies done by Fidelity International in 2020, companies that focused on sustainability reported higher equity issuer returns.
- Only Institutional and Millennial Investors are Focused on Sustainable Investing
Change is mainly associated with the new and younger generations, and it is no surprise to see some believing environmental, social, and governance (ESG) stock investing can only invoke interest in them. It is true that millennials are more interested in ESG investing, but they are not alone. While they take the lead, 72% of all investors are also interested in ESG investing.
Once more people (investors) realize that ESG investment, from stocks to ETFs have better performance, they jump in right away.
An investor might direct only some limited funds to diversify his/her portfolio, but will increase the ESG related investment products plus funds after realizing the difference with standard instruments.
- Sustainable Investing is Only a Trend that Will Fade
This argument is untrue. Recently, more investors, including seasoned fund managers, appear in agreement that sustainable investing is the best approach to success. Its adoption was intensified by the recent COVID-19 pandemic, which demonstrated the importance of preparing for future risks. For example, Hong Kong Stock Exchange (HKEX) requires all the listed firms to prepare ESG reports that anticipate future ESG challenges, from financial to socially-related ones, and outline clear plans to tackle them.
Benefits of ESG Investing Stocks
Here are some of the benefits that you should anticipate from ESG investing stocks:
- Delivers Higher Returns Compared to Standard Stocks
ESG-focused companies have better management and sustainability strategies, which return impressive operational costs, better innovation, lower staff turnover, and reduced compliance-related costs. All of these considerations go a long way in raising shareholder value. Therefore, you can expect to make more gains by pinpointing the best performing ESG stocks on the market.
- ESG Investing is an Effective Way of Helping Address the Challenges Facing the Planet
Over the last few decades, human activities have accelerated biodiversity loss, climate change, and intensified pollution of aquatic ecosystems, among other negative impacts. Now, public pressure is growing for companies to play a bigger role in advancing sustainability. You can also be part of this effort through ESG stock investing.
ESG-oriented companies incorporate sustainability at all levels of their operations. You will find most of them working extra hard to reduce carbon footprints by addressing activities that release greenhouse gasses. Others identify or initiate programs that help accelerate forest restoration, support social justice, and promote equity.
- Excellent for Both Short and Long-Term Investing
When investors identify specific securities of interest, most of them want to be assured of long-term returns before committing their funds, but this is never easy with standard stocks. ESG-focused companies use strategies that target delivering value over the long term. By following ESG sustainability reporting principles, the companies put a lot of emphasis on intra-generational equity, which requires careful planning to tackle every challenge along the way for high profitability.
How to Identify the Best ESG Stocks
Now that you know the benefits that come with using ESG stocks, how exactly do you identify them? Here are some useful tips to consider:
Use ESG Sustainability Reporting
This is the most preferable method of identifying a company that is committed to sustainability. ESG reporting is a process of disclosure where a company reveals the risks and opportunities from its operations in three areas: environmental, social, and governance. Although what investors get at the end of the reporting phase is a report, ESG reporting is an ongoing process that can help you to see the journey taken by a company on sustainability considerations.
Another reliable method that you can use to identify companies that are focused on ESG sustainability is their ESG scores. These are ratings provided by third-party organizations to help investors compare the firms that are more sustainable. For example, MSCI rates companies ESG performance from AAA to CCC based on their ESG impact.
The target is to identify stocks of companies with the highest ratings because they are likely to have good structures for promoting sustainability.
This guide has demonstrated that ESG stock investing is an excellent option because it provides greater assurance of long-term benefits compared to standard securities. The benefits also extend to the entire planet since ESG-focused companies are always looking for better ways to impact the planet positively. To make your ESG investing stocks more profitable, you should also consider working with Diginex.com professionals.
We can help you identify the best stocks, craft the right investment plan, and a lot more. Talk to us today for help with all your ESG investment needs.