How ESG Screening Helps Investors Make Decisions

August 22, 2022

How ESG Screening Helps Investors Make Decisions

With the ever-growing demand to shift to a low-carbon economy becoming more apparent, there is no doubt that the future will be defined by sustainable performance and investing. Investors are no longer just interested in optimising returns from business of interest but are making their moves cautiously to ensure they help to protect the environment at the local and global level. From asset managers to individual investors, they are employing the latest ESG screening methods to pinpoint the best companies to work with for investment. 

This post digs deeper into environmental, social, and governance (ESG) screening to demonstrate why it is so important for investors. We will also outline important steps that you should follow to improve your company’s ESG score and attract the growing list of sustainability-conscious investors. 

What is ESG Screening?

This is a method of reviewing investments to ensure that only the options, such as stocks or funds that are responsible and focus on sustainability, are selected. The screening requires the review of more data/ information from the companies or funds of interest. Although sustainability screening can be employed in almost every area of interest in corporate or company operations, investors mainly use it when targeting the following: 

  • ESG Funds. 
  • Impact funds. 
  • ETF Funds.
  • ESG Stocks
  • ESG Indices.
  • Sustainable sector funds. 

Why ESG Screening is So Important to Investors

The primary reason for ESG screening by investors is to ensure they are satisfied that their money will be channelled to areas that will have a positive impact on the planet. This means that investors are helping to make the planet a better place for all by promoting sustainable companies. Here are other benefits of ESG screening:

  • Helps Investors Identify the Companies Committed to Sustainability 

After realising that environmental, social, and governance (ESG) sustainability is the preferred option by most stakeholders, from investors to consumers, more companies are claiming to be eco-friendly without clear verifiable data to showcase their ESG activities. This false presentation is referred to as greenwashing. It is a dangerous path for companies and it can easily damage their portfolios. Every manager of an investment fund or even individual investors, often walk away when they notice a greenwashed company. 

ESG screening helps to identify the companies or funds that are fully committed to sustainability before investors can commit their resources. Through screening, they can see the type of businesses that a specific fund targets and determine if they are sustainable. For example, a good fund should only target businesses with impressive MSCI ratings. Investors can even check closely to see specific data on the performance, ESG-based activities, and future plans of specific companies before making investment decisions. 

  • It is Changing the Focus of Fund Managers

Although investors are the liquidity providers, the way the funds are used largely depends on the fund managers. ESG screening provides the emphasis from investors that they do not want their resources pooled in the fund used in a way that can harm the planet. For example, fund managers might opt to buy stocks of a company that is committed to green energy despite its modest returns to a different firm that is making huge profits but with a high carbon footprint. Investing in companies that have their focus based on responsible waste management, social justice, and modern technology can also be a good idea. 

Companies that are committed to sustainability tend to be more profitable over the long term compared to those not focused on sustainability. Therefore, separating them from others through screening can help guarantee better performance and returns in the long-term.  It is because of this that some capital markets, such as the Hong Kong Stock Exchange (HKEX), are insisting that every listed company must provide a clear plan for sustainable performance both in the short and long term.

  • Ensures the Funds by Investors are Directed to Specific Areas 

Unlike in the past, when investors used to channel their money to funds or stocks without targeting a specific area, it is completely different today. Now, investors want to make bigger impacts in specific areas of the environment, governance and community. For example, an investor that wants to make an impact in conservation might use ESG screening to select a fund that targets tourism or forestry.  

ESG screening can also help to identify a fund that targets to address social justice and empowerment. For example, you can target ETFs that focus on social-based stocks and bonds. When people go for such investing, they are sure of making more positive impacts on the society without foregoing their goals of optimising profitability. 

How to Improve Your Company’s ESG Rating 

Now that you have seen the growing specificity of investors through ESG screening, it is time to improve your business’s sustainability rating. This could make more investors want to have your company’s stock featured in their investment portfolios. More ETFs are also likely to take note and feature your stock in their portfolio. So, here are some of the things you can do to improve your environmental, social, and governance (ESG) rating or score: 

  • Reduce Your Carbon Footprint

Cutting down your carbon footprint means that you are part of the global initiative targeting to help address the problem of global warming and climate change. Consider adopting a target like zero emissions within a specific time frame and then demonstrate a path towards achieving it. Almost every ETF management will check companies’ carbon footprint alongside other responsible operations before making a decision to include it in the investment portfolio. 

  • Shift to More Renewable Energy Sources

Shifting to renewable energy, such as solar energy, can come in handy in reducing the cost of operations in your company. It is also an important part of reducing the carbon footprint and improving the MSCI rating of your company. Remember to provide verifiable data on the positive impact of such shifts towards your company’s sustainable strategies.

  • Support Local Conservation Initiatives

It is impossible for businesses to achieve significant moves towards sustainability when working alone. Therefore, your company should consider supporting other local and global entities that are committed to sustainability, such as conservation groups. You can also work with empowerment groups or social justice initiatives to make a global positive impact.

  • Adopt ESG Sustainability Reporting

To make your efforts known, get a higher MCSI rating and make every leading ETF to note your brand, you should also provide regular ESG reports for stakeholders. So, start with a clear plan, set specific targets, and then capture the progress along the way. Remember to use appropriate ESG reporting software so that the information you capture in the report is accurate, verifiable, and helpful in pushing your ESG rating higher . 

This post has demonstrated that ESG screening is becoming a crucial part of evaluating investments before people can make important investing decisions. Therefore, you have the best opportunity to make your company or firm win their support of investing entities like ETFs and individuals by adopting sustainability and accurately reporting your efforts. At Diginex.com, we have the best ESG apps for your company and professionals to hold your hand in the sustainability journey. Contact us now for all the assistance you need on ESG and sustainability matters.

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