Recent years have shown that people have significantly started to consider the interdependencies between the different branches like social, environmental, and economics and also their issues in the field of investment. The devastating COVID -19 pandemic played a major role in encouraging this thought process and this trend.
The concept of ESG investing is based on this thought and trend, Also known as ‘impact investing,’ ‘sustainable investing,’ and ‘socially responsible investing,’ the concept refers to the practice of investing by considering factors like environment, social, and governance.
The idea was built around the understanding that the financial performance of an organization is highly influenced and affected by social and environmental factors.
The concept of ESG investing had been around for years. The practice was followed by different religious and ethnic groups for a very long time. Even though the practice was a familiar one from earlier times, the release of Principles of Responsible Investments brought the concept back and made it a mainstream idea that we see today.
The Principles of Responsible Investments are a set of guidelines issued by the United Nations that prompted companies to incorporate ESG factors into their business policy and strategy. It was published in 2006.
As the world had faced many major issues in the recent past, there had been a growing popularity for the idea of ESG investments.
As per the reports of a study of around 1,000 investors which was commissioned by the Capital Group, 89% of those investors have adopted the idea of ESG investing in 2022 as opposed to 84% in 2021. The study suggests that there is around a 5% increase in the number.
While the popularity of the concepts keeps on getting bigger, experts in the field have now come up with some of the possible trends for the concept in the coming years. We have compiled the popular opinions for the readers who are interested to see what 2023 has in store for ESG investors.
- Headwinds For 2023
Recent world events like the conflict between Russia and Ukraine created huge opportunities for energy and defense companies. The growth of these companies was much larger when compared to other firms that supported the concept of ESG investments, which were mainly tech companies.
As a result of such issues, many ESG-friendly companies had to face quite some losses in the past year.
The investment director of sustainability at Schroders, Whitney Sweeny believes that the situation is made worse by the skeptical rhetoric that surrounds the ESG investments. She believes that these problems will follow into the new year.
She also added that even though there might be problems for ESG investors, holding on to the concept will give rise to a much more sustainable economy that will provide more opportunities in the future.
- Greater Regulatory Oversight
The concept of ESG investment is spread over multiple industries that belong to different sectors. While the adaptation of ESG is seen as a good practice, it has left the concept without clearly defined criteria as to what constitutes ESG investment and how this concept of investment affects the environment and social outcomes.
The lack of a clear-cut criterion for ESG investments has left investors demanding a much clear and distinct, standard idea that can be easily followed by all.
As the demand is getting stronger from different areas, regulations regarding the concept can be expected from the government. This new system or clear idea, if implemented, is expected to give investors an idea about what they are investing in.
- Increased Impact Investing
It is true that most investors do not have a clear idea about the concept of ESG investment and many are still confused about the idea. The prime aim of the strategy was to account for the greater good of the future, most people see it as a measure or way to determine the risk level of their company’s social, environmental, or governance practices.
One of the reasons why ESG investors choose high-scoring ESG companies is that it will help them with their overall portfolio rather than understanding the concept as something that might help the planet in the future.
Even though the industry finds it difficult to understand the concept and workings of ESG investment, it is calculated to emerge as one of the best ways to portfolio development and also initiate a positive impact on people and the planet.
- Emphasis On DEI
According to experts, there will be much more acceptance and understanding of the concept of ESG investment but along with that, the strategy will be more focused on ideas like diversity, equity, and inclusion or DEI in 2023.
In the case of the United States, it is expected that the majority of workers will be people of color and as a result, it should be given special consideration about how the companies incorporate their DEI factors in their approach to policies for workers and also in their hiring processes.
- Biodiversity As “The New Climate”
While the diversity that exists when it comes to the human race receives much attention on the account of ESG, there is another diversity that we should seriously consider. It is the biodiversity of our earth – the variety of plants, animals, and other microspecies that make our nature vibrant and our life possible on the planet.
One of the most important focuses of the concept will be to reduce biodiversity loss. Creating a balance between the different life forms of our planet and also extending support to those lives is an essential part. It is considered to be extremely important that some believe that biodiversity may be “the new climate.”
The recent change in climate and the adverse effects caused by those climatic changes have led to many changes in the practices of different companies, but the initiatives need to be stronger to make a better change.
Policies like incentives for environmental-friendly practices and penalties for practices that are harmful to the environment are suggested by many to make the changes a bit more strict.
Experts advise people to invest in companies that focus on practices like recycling and reusing which contribute to conserving biodiversity as something that will ensure long-term growth opportunities and also that grant financial returns.