ESG investing


ESG investing

Beyond the balance sheet

After the ESG basics, it’s time for some ESG analysis – let’s uncover the behind-the-scenes process that helps us identify the most responsible, sustainable, and (fingers crossed) profitable investments. 💸

So, grab a cuppa, get comfortable, and let’s dive in!

ESG rating systems: The scorecard for good behaviour

Imagine you’re a teacher and your students are the thousands of companies across the globe. How do you grade them on their ESG performance?

Enter ESG rating systems. These provide a systematic and consistent way of evaluating companies on a range of ESG factors.

Rating firms like MSCI and Sustainalytics dive deep into companies’ activities, using a mix of public data, company disclosures, and independent research to create ESG scores.

It’s a bit like how a credit rating agency works, but instead of just looking at a company’s financial health, they’re assessing their environmental, social, and governance health too!

Here’s an interesting tidbit for you: According to MSCI, as of 2020, companies with higher ESG ratings were more likely to outperform their counterparts in the global market. Seems like being good can pay off, eh? 😇

Sustainability reports: The corporate tell-all

Sustainability reports are a bit like a company’s diary, where they spill the beans on their ESG performance. Many companies publish these reports voluntarily to showcase their commitment to sustainable practices.

These reports can give you valuable insights into how seriously a company takes its ESG responsibilities. For example, if a company’s sustainability report shows they’ve reduced their carbon emissions by 20% over the past year, it’s a good sign they’re committed to environmental stewardship. 🌳

Fun fact: The first corporate sustainability report was published by Ben & Jerry’s 🍦 back in 1989 (yes, the ice cream company!). Today, over 90% of the largest 250 corporations globally publish a sustainability report.

That’s a lot of reading material!

The role of ESG in risk assessment ⚖️

In the world of investing, risk and reward are two sides of the same coin. ESG analysis plays a crucial role in assessing the potential risks associated with an investment.

Consider this: A company that doesn’t care about its environmental impact might face hefty fines, clean-up costs, or even be shut down. Those who don’t treat their employees fairly could see high turnover rates, strikes, or lawsuits.

And companies that lack strong governance could face regulatory scrutiny or lose the trust of their investors. All of these risks can hit a company’s bottom line hard – and consequently, your investment returns.

For instance, consider the BP Deepwater Horizon oil spill 🛢️ in 2010. Following the disaster, BP’s stock price dropped dramatically, hurting investors who had stakes in the company.

On the flip side, companies that excel in ESG factors can mitigate these risks and potentially offer more stable returns over the long term. In fact, a 2020 study by the University of Oxford found that companies with better ESG ratings demonstrated better operational performance and were less risky.


Bringing it all together

As we can see, ESG analysis involves a lot more than just glancing at a balance sheet. It’s about delving into the nitty-gritty of a company’s operations and understanding how they’re making a positive impact on the world.

Remember, investing isn’t just about the potential for financial returns. It’s about using our money to shape the kind of world we want to live in. So, as you delve into ESG analysis, remember: you’re not just an investor, you’re an agent of change.

In the next chapter, we discuss how you can structure your own ESG portfolio!

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