ESG Investments Explained and Top Companies List

What is ESG investing?

ESG in ESG investing represents the environment, society, and management. Socially responsible investors will consider these three criteria when selecting new investment projects. ESG investing began in the 1960s. Investors are beginning to exclude stocks, or even entire industries, from their portfolios in line with the ethics of business activities. Since then, investors have increased their ESG awareness, and ESG investment has been booming.

Environmental protection focuses on the company's impact on land. This includes climate change, natural resource conservation, pollution, and waste. Does the company manage toxic emissions in accordance with government regulations? Does the company plan to reduce emissions in the future?

Social responsibility examines a company's relationships with all stakeholders: employees, customers, suppliers, and the communities in which it operates. Is the supplier acting in accordance with ethical standards? Does the company donate a portion of its profits to charity? Is the health and safety of employees a major concern for the business?

Company management refers to the management, remuneration, internal control, auditing, and shareholder rights of a company. Are the company's accounting methods transparent? Does the company provide strategic political contributions in exchange for preferential treatment?

Every day there are more conscious ESG investors. The current trend is that younger investors are more responsible in the market. They're looking to invest in companies that practice sustainability and uphold the rights of their employees. Major blue-chip companies are aware of this trend and have begun to invest and reform themselves to enhance the ESG awareness of all employees and promote corporate social responsibility. Companies that improve their ESG ratings tend to invest more in the short term, but when done right, these sustainable investments can greatly improve their long-term performance.

In 2017, Barron's 100 most sustainable companies returned 29%, compared to 22% for the S&P 500. The difference in returns of 7% from year to year is significant. One goal of ESG investing is to avoid companies that suffer serious losses in ESG practices. A recent example is the Volkswagen exhaust emissions scandal. Other notable scandals include BP's oil spill and Enron's accounting fraud. These events cost these companies billions of dollars. Businesses are increasingly ESG-conscious to avoid this type of loss.

Who sets ESG standards?

ESG evaluations can be broad and subjective. However, appropriate standards are in place to assess whether companies are adhering to proper environmental, social, and governance practices. The International Finance Corporation (International Finance Corporation) provides most segments of environmental and social risk. Some of these ESG categories include resource efficiency, biodiversity, workforce, land resettlement, and community.

Morgan Stanley Capital International (Morgan Stanley Capital International) has developed its own ESG investment indicators. Their sustainable impact indicators are in line with the United Nations Sustainable Development Goals. The biggest topics they measure are basic needs, empowerment, climate change, natural capital, and governance.

ESG investments are becoming increasingly prominent. More investors are incorporating ESG data into their analysis. You can learn more about ESG integration by checking out the CFA Association's ESG Consolidation Report, which covers both equities and fixed income. ESG investing is an international trend. Paul Smith of the CFA Institute (CFA Institute) wrote, “Many countries are developing a consensus that asset management companies' fiduciary responsibility is to include ESG factors in their financial analysis, particularly when these factors have a significant impact on a company's long-term outlook.”

Does ESG impact corporate performance?

Some investors are concerned that they are sacrificing returns when investing in companies with ESG mandates. This is far from the truth. In a 2015 study, the University of Oxford and Arabesque Asset Management (Arabesque Asset Management) examined 200 ESG-focused companies and reported that 88% of companies benefited from ESG performance: “Robust sustainability practices prove better operating performance, which ultimately translates into cash flow.” A prudent approach to sustainability will not affect performance. In fact, they increased profits and had a pretty positive impact on the company.

Top ESG companies

Clorox (NYSE: CLX) — Exceed environmental requirements. By 2020, Clorox wants more than 90% of its products to be in recyclable primary packaging.

The appeal of socially responsible investing is growing. These companies are setting new standards for ESG investing. ESG investing has many investment opportunities. For example, Berkshire Hathaway (Berkshire Hathaway) announced plans to add wind and solar power generation capacity to its utility holdings. ESG companies not only return shareholders with socially responsible portfolios, but some of them also pay high dividends. To learn more about dividend earnings, follow Aitou Academy. Our chief revenue expert, Li Tengfei, is dedicated to studying high-yield dividend stocks. His reviews are published in the Wall Street Journal, Barron's, and US News and World Report. He also appears frequently on CNBC (US Consumer News and Business Channel), Fox Business Channel, and Yahoo Finance.