In recent years, Environmental, Social, and Governance (ESG) elements have emerged and gained significant traction in the investment landscape. ESG refers to a set of criteria used by investors, regulators, and industry organizations who are not only considering financial returns, but also challenging companies to pursue environmental, social, and governance practices. ESG’s growing interest has led to the rise of ESG investing, influencing various industries and shaping investment strategies. We will begin with an overview on ESG and dive into how it affects investments, impacts certain industries, and how it is evolving with the current market.

ESG and Investments

Investors are showing growing interest in the broader impact of their investments, extending beyond mere profits, and considering a wide range of ESG factors that are not traditionally part of financial analysis. According to a study done by Capital Group in 2022, 89 percent of investors consider ESG issues in some form as part of their investment approach. BlackRock, the world’s largest asset manager, became a leader in the U.S. in ESG investing with CEO Larry Fink urging companies to adopt more socially conscious practices.

The environmental components encompass a company’s carbon footprint, waste management, and resource usage. Social components involve aspects such as employee relations, diversity and inclusion, and community impact. Governance components pertain to a company’s leadership, broad structure, and transparency. ESG investing acknowledges that a company’s long-term financial performance is closely linked to its ability to manage risks and opportunities effectively.

Impact on Industries

Energy: ESG integration in investment decisions has brought significant changes in the energy industry. Fossil fuel companies are facing scrutiny with firms now under pressure to disclose their ESG performance and align their strategies with sustainability goals. Increased awareness of the need to reduce greenhouse gas emissions, combat climate change, and meet sustainability targets has fueled a shift towards renewable energy sources. This shift in investment preferences has accelerated the development and adoption of renewable energy projects and technologies. As ESG continues to evolve, its influence will help shape the energy industry and support the global transition to a more sustainable energy system. 

Technology: ESG criteria has encouraged technology companies to address their carbon footprint by reducing waste, conserving resources, and minimizing environmental impact. ESG-minded investors assess companies based on their focus on environmental sustainability, board diversity, and the handling of customer data. Additionally, ESG has pushed corporate leaders to focus more on workforce diversity and inclusion. Having diverse teams can enhance decision-making, drive innovation, and contribute to sustainable long-term growth. Lastly, concerns surrounding data privacy and security have prompted companies to recognize the importance of protecting user privacy rights and maintaining data integrity.

Consumer goods: The rise of ESG has also led to increased demand for sustainably and ethically produced consumer goods. Customers are now more inclined to support companies with eco-friendly products, pushing companies to prioritize sustainable sourcing, adopt sustainable packaging alternatives, provide safe working conditions, and provide transparent product information. Companies that actively address ESG concerns are more likely to attract ESG investor interests and consumers are more likely to support and remain loyal to brands that demonstrate strong ESG practices. The integration of ESG principles in the consumer goods industry reflects the growing awareness and demand for environmentally, ethically, and socially responsible products and practices.

ESG Evolution in the Current Market

ESG reporting standards and procedures have evolved over the past several years and will continue to evolve this year. In March 2022, the SEC issued a proposal to enhance and standardize climate-related disclosures for companies by having them provide their climate-related risks, their climate-related targets and goals, their greenhouse gas emissions, and how the board-of-directors and management oversee climate-related risks. The importance of transparency in reporting ESG matters has increased and investors want firms to provide ESG disclosures that are directly linked to the company's strategy. Moving forward, companies will need to adhere to the SEC’s rules regarding climate-related disclosures and be aware of the constantly changing environment. 

Artificial Intelligence (AI) has gained increasing popularity among the business world and will have a significant impact when it comes to ESG practices. AI technologies can be leveraged by companies to monitor and analyze their impact on the environment, fight against discrimination and promote ethical hiring behavior, analyze corporate government data, and assist in detecting fraudulent activities. AI can also help investors collect and analyze large amounts of data, identify trends, and assess the ESG performance of companies more effectively.

While AI can be useful for investors to gain deeper insights to company practices and enable them to make better-informed decisions, it is important to be aware of the ethical concerns surrounding AI. It is important to ensure data privacy regulations are being followed when using AI-powered tools by implementing security measures within the company and conducting periodic security audits to identify any risks in the data-handling process. Creating AI algorithms also requires significant energy consumption and therefore has a significant environmental impact. Overall, AI holds the possibility to change the way companies and investors approach ESG practices as long as companies recognize the ethical challenges AI brings.

What This Means for Investors

ESG considerations have spurred shareholder activism, with investors increasingly using their influence to drive positive change. Shareholder activism and proxy voting have become important tools for holding companies accountable and putting pressure on companies to align ESG practices with investor expectations. By using their ownership stakes in companies, shareholders can influence corporate decision-making and demand greater transparency, accountability, and sustainability efforts. For example, an activist investor might fight for climate change policies, board diversity, human rights, and executive compensation. With the rise of ESG comes the rise of shareholder activism and actively driving positive change within companies.

The concept of ESG is not going away, it will only become more standardized and prioritized within companies. ESG-minded investors will continue to pursue ESG initiatives and push companies to be more environmentally friendly, socially conscious, and continue to maintain strong corporate governance. As we move forward, ESG will continue to shape the investment landscape, promoting companies and investors to prioritize sustainability, responsibility, and long-term value creation. ESG investments are just as risk-prone as non-ESG investments so it is important to be cautious and monitor your investment portfolio. At Robbins LLP, we are committed to monitoring and protecting investors from shareholder fraud and corporate malpractice. Click here to monitor and protect your investments today with Stock Watch. 

- written by Lindsey Johnson