ESG: An Overview of Environmental, Social and Governance Investing

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Environmental, social and governance (ESG) investing is a form of investing that considers environmental, social and corporate governance factors when making investment decisions.

The aim is to generate positive returns while also taking into account the impact on society and the environment. ESG has become increasingly popular among investors due to its potential for providing both financial rewards and greater sustainability.

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Understanding ESG Investing

At its core, ESG investing is based on the idea that sound environmental, social, and corporate governance practices are associated with long-term business success, which can lead to higher stock prices and dividends. Investors who integrate ESG factors into their decision-making process seek to invest in companies that demonstrate strong performance in these areas.

This could include firms that reduce their carbon footprints, promote workplace diversity, or adhere to stringent standards for corporate responsibility. By doing so, investors can not only hope to achieve superior financial returns but also make a positive contribution to society.

Investors increasingly rely on ESG reporting to make socially responsible investment decisions and assess long-term risks.

The History of ESG Investing

The term “ESG” was first used in the early 2000s, but the concept of sustainable investing has been around since the 1970s. Initially, investors focused primarily on environmental issues such as climate change, pollution control and resource conservation. Over time, however, the focus expanded to include social issues such as human rights, labor conditions and poverty alleviation, as well as corporate governance measures such as executive pay and board composition.

In recent years, ESG investing has seen rapid growth as more investors become aware of the link between sustainable practice and financial performance.

According to a report by Morgan Stanley, assets invested in funds that use ESG criteria reached $30.7 trillion worldwide in 2020, up from $22.9 trillion in 2018.

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Texas’s Fight Against ESG Policies

Texas has been at the forefront of opposition to ESG policies. In 2021, it passed laws requiring state pensions to divest from asset managers that “boycott” fossil fuels and excluding banks from underwriting bond sales over their gun safety rules.

Last week, Texas Comptroller Glenn Hegar sent letters to five state pension funds urging them to divest holdings and cut fees to financial firms.

Now, legislators are setting their sights on insurance companies. A bill expected to be introduced soon by the Texas Senate would penalize insurers whose ESG policies threaten the oil and gas industry, just like they did with banks. If ESG-focused insurance companies can’t provide coverage to projects related to oil and gas, those projects may cease operations.

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ESG Gains Momentum in Congress

On Wednesday, the Senate voted to overturn a Labor Department rule allowing retirement plans to consider environmental, social, and governance factors when making investments. It follows a similar vote by House Republicans on Tuesday, setting the stage for President Joe Biden’s first veto.

Critics say ESG investments allocate money based on political agendas, whereas proponents argue that using an ESG lens could help investors find better, more profitable opportunities.

It appears likely that ESG will continue to gain momentum in the coming years. Already in 2023, global ESG assets are projected to reach $45 trillion, according to a report by Morgan Stanley — nearly double what it was in 2020.

As more people become aware of the benefits of ESG investing and demand grows, institutional investors will be hard pressed to ignore the calls for additional transparency and accountability.

As people become ever more conscious of the long-term effects of their actions, it is no surprise that ESG investing is becoming increasingly popular.

With growing pressure for increased transparency and accountability, institutions are recognizing the benefits of incorporating environmental, social, and corporate governance considerations into their investment strategies. By doing so, they can simultaneously generate positive returns and benefit society today and in the future.