What is ESG?
When choosing what companies to invest their money in, many people look at the information that they consider the most valuable. Typically, this includes earnings, growth, profit margins, and everything else that has to do with the revenue aspect of these companies. However, in order to increase your efficiency with investing, it’s also important to apply the ESG method to your investments. ESG stands for Environmental, Social, and Governance, and is the key to understanding the complexities of the companies you are researching.
The environmental aspect of ESG promotes investors to look at the carbon footprints and climate effect of a company. Companies with reduced environmental impacts are much more sustainable, due to the rising cost of natural resources. Businesses that are less dependent on natural resources will beat out their competition, and have a greater chance for long-term success.
Socially, make sure to pay attention to your investments by analyzing working conditions, human resource management, and its relationship with its clientele. Efficient management is vital for maintaining a company. No matter the product, a company that struggles internally with working conditions is prone to failure. Similarly, a company that has a negative relationship with its own clients is unacceptable for an investor. Bad experiences will slowly result in smaller numbers, which is inefficient and inadequate for any type of company. Companies with bad client relationships may also be forced to cut corners to compensate for this loss of income, which might not be obvious the first time you look into a potential investment.
Lastly, the Governance part of ESG investigates the structure of the business itself, How the corporate officers are appointed, and if there is respect for shareholders. Corporate governance is important because it creates a system of rules and practices that determine how a company operates and how it aligns the interest of all its stakeholders. Good corporate governance leads to ethical business practices, which leads to financial viability.
The integration of ESG factors is a key factor in sustainable performance, and helps to reduce risks of an investment. Here at LeonardMcDowell, we use ESG in our investments in order to better understand our potential investments. Using this strategy allows us to identify risks early, and assess the consequences of them easily. Not only this, but applying an ESG structure has allowed us to focus on long-term investment opportunities, and truly create value for clients. ESG gives meaning to investing, and can help any investor ensure the sustainable performance of their investments.