Ethical investing is becoming more commonplace, particularly among younger generations. Millennial and Gen Z investors and consumers are like-minded in the sense that they want to invest in and purchase from companies that contribute positively to the environment. However, business as a whole is fixated on profit, which can make it challenging to prioritize financial decisions that support ethical standards consistently.
Companies are aware of the gradual shift to sustainability, with greater degrees of sustainability more apparent depending on the industry. Car companies, for instance, are heavily focused on greener initiatives as electric cars have become popular in recent years. With the influx of sustainable efforts, there have also been attempts to “greenwash” investors and consumers to profit quickly.
Ethical investors must be aware of these issues to preserve the integrity of ESG factors in their investment decisions. ESG factors regard the environment, social, and governance factors influencing sustainable investments and humanity as a whole. For more information on the rise of Sustainable investing and how ESG factors are shaping the future of finance, continue reading below.
Sustainable Investing And ESG Factors Matter
The three pillars of Sustainable investing are environmental, social, and governance variables that serve as legitimizing factors for pursuing an investment and deeming it an ethically sound decision. While long-term returns are still a critical component of this type of investing, the financial gain is not the only component of importance. ESG factors are considered essential priorities for ethical investing, and without these factors, ethical investors look elsewhere for their investment opportunities.
Environmental factors include the variables that impact how companies’ actions influence the environment. Some examples of these factors are carbon emissions, waste management, resource management, and initiatives to fight climate change. Social factors concern how employees and customers are treated and the communities impacted by these companies. Some examples of social factors that consider the social impact are workplace diversity, engagement in community efforts, human rights, labor practices, etc.
Companies that demonstrate significant harm to workers and those associated with them, such as family members, nearby communities, etc., are deemed unethical and are not pursued. Governance variables pertain to the practices that companies follow to ground and orchestrate their operations. These variables include leadership styles, inclusion and board diversity, corporate ethics, etc.
Determining The Total Human Impact Is Essential
It takes substantial research and human impact analyses to determine how ethical a company is and whether or not it should be considered an ethical investment. Sustainable investing is concerned with the global human impact, or the ratio of benefit to harm that a company’s actions, products and services, and overall effects have on humanity as a whole. Sustainable investing is still interested in finance again, but not at severe expense to human welfare. There is no way to eliminate harm entirely, no matter how green or eco-friendly a company is; therefore, the goal of Sustainable investing is to determine which efforts are the most ethically sound for humanity and that also contribute to financial growth.
Investors Calculate The Human Impact With Dollar Amounts
Investor firms can help sustainable investors calculate the total human impact of various companies under consideration. A dollar amount is assigned to ESG factors and companies based on their benefits vs. costs to create a measurable interpretation of their impact. Seasoned investors also utilize their Sustainable investing portfolios to guide their investment decisions based on the rankings they’ve put together by reviewing other companies and their use of ESG factors.
ESG Standardization Is Not Yet Final
The standardization of ESG specifics is still in the works, making it challenging to classify the ethicality of various companies. In the interim, Sustainable investing utilizes the “golden rule” and weighs the benefits and harms of a company’s actions and byproducts. The company contributing the most benefit and the least damage to society, the environment, and the world is prioritized over its counterparts. These prioritizations typically result in companies favoring renewable energy practices and sustainable supply chains.
Although the specifications for measuring ESG factors are inconclusive, investors can focus their efforts on companies that promote the least harm, particularly to humanity and the environment. Social practices that exclude or harm workers or the community are excluded from consideration first and foremost. By placing the value of human life as the top priority, making sound, Sustainable investing decisions is easier based on the additional ESG factors a company has put forward.
Evidence Shows Promise For The Future Of Ethical Investing
As the importance of ESG factors grows in mainstream society and across the investor world, new research is emerging in support of ESG-focused companies. Evidence continues to show that companies prioritizing ESG factors perform as well, and often better, than traditional, non-ESG-focused investments.
With these general findings, ethical investors can infer that both their financial and environmental goals can be met by shifting to Sustainable investing strategies and pursuing sustainable investments moving forward.
With traditional business growth principles dictated by supply and demand and consumer interest, focusing on eco-friendly companies contributes to financial gain for investors, whether they are ethical investors or not. More consumers are interested in products and services that support humanity, the environment, and the planet, which suggests that companies growing in popularity and wealth reflect these greener interests. The rise of social media influence continues these greener marketing efforts as today’s youngest consumers are inspired to purchase the same eco-friendly products that those they watch online are promoting. Sustainable investing is a way to value financial gain and continue prioritizing the ESG factors that influence ethical investment decisions.
The Future Of Finances Is Dependent On ESG Efforts
Societal demands to prioritize greener efforts and the indications of financial gain for making these shifts are shaping the future of finance. It is a “win-win” situation for companies, investors, and consumers. All of this suggests that the future of finances is directly shaped by how well companies can adopt ESG factors into their organizations and how critically ethical investors can evaluate their Sustainable investing projects.
