ESG advantages and disadvantages, is it a good investment strategy?
- February 10, 2023
- 10 min read
Serious about ESG investing?
Would you like to know more about ESG advantages and disadvantages?
If you’ve done a little homework about ESG investing and want to delve further into this type of investment as a viable source of income, this is for you.
Before we go on, let’s make sure we’re all on the same page as to what exactly ESG investing is.
Overview:
- What is ESG investing?
- What are the ESG advantages?
- What are the ESG disadvantages?
- Frequently Asked Questions
What is ESG investing?
ESG (Environmental, Social, and Governance) investing is the practice of considering a company’s environmental impact, social responsibility, and governance practices when making investment decisions.
If you need more information about what ESG investing is, read our article on ‘Everything you need to know about Environment, Social and Governance (ESG) investing’. This is a great place to start. [enter link and put this text into a nicely designed box]
It’s time to have a look at the pros and cons of ESG investing, to help you consider if this is a viable investment strategy for your personal circumstances.
What are the ESG advantages?
Let’s dig in on what are the benefits of ESG investing:
It matches your investments with your personal values
As an investor, you may feel more comfortable putting your investment dollars into companies that align with your personal values, such as those that prioritise sustainability and social responsibility.
You invest for long-term financial performance
Some studies have suggested that companies with strong ESG practices may have better long-term financial performance, as they may be better equipped to manage risks and capitalise on opportunities.
Investments with a positive impact on society and the environment
Companies that prioritise and have strong environmental, social and governance practices, you can potentially have a positive impact on society and the environment through your investment.
They can help you manage your risk
Companies that prioritise ESG practices may be better equipped to manage risks, such as reputational risks, legal risks, and risks related to climate change and other environmental factors.
Invest for greater transparency and accountability
Companies that prioritise ESG practices may be more transparent and accountable to their stakeholders, which can lead to better-informed investment decisions.
What are the ESG disadvantages?
As with every investment strategy, it’s important to look at both sides of the equation.
While the ESG advantages are clearly really interesting, there are also some potential drawbacks you should consider:
There is limited investment options
The pool of ESG-compliant companies may be smaller than the pool of all publicly traded companies. This can limit the number of investment options available to investors.
There is a lack of standardisation
Currently, there is no widely accepted standard for determining which companies are “ESG-compliant,” which can make it difficult for investors to compare and evaluate different investment options.
The investments may come with higher costs
Incorporating ESG considerations into the investment process can require companies to spend money on additional research and due diligence, which can increase the costs associated with investing.
There is a potential for “greenwashing”
Some companies may make claims about their ESG practices that are not fully supported by their actions which can lead to “greenwashing”.
This may make it difficult for you as an investor to identify truly sustainable companies.
There’s a good example of ‘greenwashing’ on the MoneySmart government website here.
Investments with a potential for lower returns
Some investors may be concerned that investing in companies with strong ESG practices may result in lower returns.
However, there are some studies that have suggested that companies with strong ESG practices may have better long-term financial performance.
Inexperience in ESG investing
If you are a new ESG investor, you may not be familiar with this type of investing, which can make it difficult for you to assess the ESG advantages and disadvantages of different investment options.
All the best as you begin your research of ESG companies and ESG investing. Don’t forget to talk to a Sleek team member, if you need help. Call us on +61 2 9100 0480 or leave us a message here.
Frequently Asked Questions
What does the ESG approach mean?
The ESG (Environmental, Social, and Governance) approach refers to the practice of considering a company’s environmental impact, social responsibility, and governance practices when making investment decisions. The goal of the ESG approach is to identify companies that are well-positioned to perform financially over the long-term while also having a positive impact on society and the environment.
This approach is a way for you as an investor, to align your investments with your personal values and beliefs, and also to potentially have a positive impact on society and the environment.
What are some examples of ESG companies in Australia?
There are many examples of companies in Australia that are considered to have strong environmental, social, and governance (ESG) practices.
It’s worth noting that the ESG performance of companies can change over time, and that different investors may have different opinions on which companies have strong ESG practices.
Some examples of ESG companies include:
Environment:
AGL Energy, one of the largest energy companies in Australia, which has a strong focus on renewable energy and is committed to reducing its greenhouse gas emissions.
BHP Group, a mining and resources company, has implemented a number of initiatives to reduce its environmental impact, such as increasing its use of renewable energy and reducing its water usage.
Social:
Commonwealth Bank of Australia, which has several initiatives in place to support the communities in which it operates, including financial literacy programs and community development projects.
Westpac Banking Corp, which has a strong focus on sustainability and implemented various initiatives to support the communities in which it operates, such as funding for affordable housing.
Governance:
Telstra Corporation, the telecommunications company, has strong governance practices in place and is committed to transparency and accountability to its shareholders.
Rio Tinto, mining and resources company, has strong governance practices in place and is committed to transparency and accountability to its shareholders.
How do I know which investments are ESG?
Determining which investments are environmentally, socially, and governance (ESG) compliant can be a complex process, as there is no universally accepted standard for determining which companies are ESG-compliant.
However, there are a few key steps to help you identify ESG-compliant investments:
Use ESG rating systems: There are several organisations that provide ratings of companies based on their ESG performance. These organisations include Sustainalytics, MSCI, and FTSE Russell.
By using these rating systems, investors can quickly identify which companies have strong ESG practices and which do not.
Look for companies that have committed to ESG goals: Many companies now publicly disclose their ESG performance and goals.
Look for companies that have committed to specific ESG targets, such as reducing their carbon emissions or increasing their use of renewable energy.
Use a socially responsible investing (SRI) or ESG-focused fund: Many mutual funds and exchange-traded funds (ETFs) now focus on investing in companies that have strong ESG practices.
By investing in one of these funds, investors can gain exposure to a diversified portfolio of companies that have been screened for their ESG performance.
Do your own research: Research companies on your own by looking at publicly available information such as the company’s sustainability report, annual report, and any other publicly available information.
Consult with a financial advisor: You can consult with a financial advisor who specialises in ESG investing.
They can provide valuable insights and expertise on identifying companies with strong ESG practices, as well as help investors navigate the complex landscape of ESG investing.
Why is ESG so popular?
ESG’s popularity has been driven by a combination of factors, including:
- a growing awareness of the importance of environmental, social and governance issues,
- the alignment of ESG investing with personal values,
- its transparency and accountability aspects,
- the potential for long-term financial performance and
- increasing government pressure on companies to demonstrate their commitment to sustainability.
Is ESG investing a good investment strategy?
It’s worth noting that even though a company may have good ESG performance, it doesn’t guarantee financial performance.
As with all investments, you should also consider the company’s financial performance, management team, and other traditional factors before making an investment.
Additionally, different investors may have different opinions on which companies have strong ESG practices, so it’s important to align your investment strategy with your values and goals.
