What is ESG and why are important for investors - The Redditch Standard

What is ESG and why are important for investors

Redditch Editorial 10th Mar, 2023   0

The acronym ESG refers to three main areas, precisely Environmental (Environment), Social (Company) and Governance. Each pillar refers to a specific set of criteria such as environmental commitment, respect for company values and if a company acts with accuracy and transparency or not.

What is ESG? In recent years, environmental issues and the growing political will to act have seen the evolution of ESG issues from a corporate password to a critical aspect of the operations of a company. In addition to playing a role in decisions regarding mergers, acquisitions and divestments, research has highlighted a positive link between ESG issues and financial performance or value creation. ESG factors have become increasingly fundamental for investors and social responsibility scores of companies have helped them avoid organizations with a high level of financial risk or questionable commercial practices. This article deepens what ESG criteria are, how important for companies and their investors are and much more.

Generally, the ESG criteria take on the form of a sort of social credit score in which all three categories are used to illustrate the amount of risk of a company for investors. The ESG rating is usually calculated on the basis of data and metrics relating to the intangible resources of an organization. Consequently, the decision to invest is not based exclusively on the economic performance of an organization, but also on values such as respect for the environment and effective governance.

The socially responsible investment (Socially Responsible Investing, Sri) is not new and the practice of investing according to the ESG lines began in the 1960s. The modern history of ESG principles can be traced back to the beginning of 2004, when the then secretary general of the United Nations, Kofi Annan, had invited more than 50 CEO of the main financial institutions to participate in a joint initiative aimed at integrating the framework values in the capital markets. The acronym itself was coined about a year later at the 2005 “Who Cares Wins” conference.




The event brought together institutional investors, patrimonial managers, Buy-Side and Sell-Side research analysts, global consultants and government bodies that have explored the role of ESG factors in patrimonial management and financial research. In the following years, the ESG factors recorded a remarkable increase in line with the responsible investment.

Although they cover a wide range of issues that traditionally were not part of the financial analysis of an organization, many of the elements covered by ESG issues have a significant financial importance. According to Bloomberg, the global ESG assets are on the right way to exceed 53 trillions of dollars by 2025, representing more than a third of the 140.5 trillion of dollars of total assets under expected management.


Because ESG criteria are important for investors

Unlike the past, in which investors were more interested in investing in companies or projects attractive only from an economic point of view, today there is a new generation of socially aware investors who want to invest in organizations with the same moral principles and values in which they believe.

There were fears that the trend would have lost vigor in recent years since companies have fought to cope with the economic pressure due by the Covid-19 pandemic, but an analysis carried out by the consultancy company Ey has detected the opposite: companies In fact, they accelerated their transition to a more inclusive and proactive capitalism despite the impact of global pandemic.

There are numerous reasons why the trend remains solid. The pressure to pursue more sustainable strategies comes from both the public and the governments. In the case of the latter, the stimulus packages have been linked to ecological results. For example, the Fund for the resumption of Covid-19 of 750 billion euros of the European Commission provided that a quarter was allocated to the mitigation of climate change.

There is also a growing awareness between investors and companies that ESG criteria could become mandatory, which means that it is prudent to adopt sustainable strategies to keep up with any future “green” legislation. Many other factors also have an influence on ESG rating, as a positive score that proves to be fundamental for the ability of a company to attract and retain the best talents.

It is also important to remember that the ESG criteria are different from the socially responsible investment (SRI). While Sri is generally based on value judgments and excludes companies based on certain criteria, ESG factors are more focused on the environmental, social and governance values of the organization, together with their impact on performance. Sustainable investment is certainly a hot topic, but how important is it today? An analysis of the 2020 CFA Institute found that 85% of investment professionals took into consideration ESG factors when it made their investment, compared to 73% in 2017. The bright future of ESG investments and ESG shares It is summarized by a PWC report that states that “a growing number of tests shows that companies with strong Esg principles overperformo. In particular, studies show that companies that focus on the most relevant ESG indicators from a financial point of view for their sector tend to perform well “.

The report continues by adding that “companies are improving in spreading the ESG scores that are more important for their long -term profitability”. The combination of increasing demand and investment logic will therefore guide the rapid growth of the ASSIT ESG pool. ESG results and ESG funds will be likely to become an integral part of the investment solutions, while ESG analysis is on the right way to become an essential investment tool.

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