What Is ESG Investment? Why It's Expanding In The World?

What Is ESG Investment Why It's Expanding In The World - Moniedism

Recently, "ESG investment" has become a hot topic in the field of asset management. "ESG" in "ESG investment" is a combination of the English acronyms for Environment, Social, and Governance. In addition to conventional financial information, there are three types of ESG. It is an investment that is conscious of the viewpoint. Why is this “ESG investment” attracting worldwide attention now?

What is "ESG investment" that is attracting attention these days?

“ESG investment” is an investment that emphasizes the degree of contribution to the environment and society, and whether or not consideration is given to governance. Until now, the idea of investment has been to focus on "numbers" and "money" such as the performance and profits of the investee company, and how much monetary return can be expected. In “ESG investment,” companies to be invested are evaluated not only from the perspective of financial information, but also from the perspectives of the environment, society, and governance. It is also an investment principle for investors to incorporate ESG perspectives.

“ESG investment” came to the forefront in 2006 when Mr. Annan, then Secretary-General of the United Nations, proposed the Principles for Responsible Investment (PRI). PRI incorporates ESG into the investment process, and asset owners such as pension funds and management companies voluntarily sign and announce their participation.

Seven Methods for ESG Investment

There are seven types of ESG investment methods. The most used ESG investment approach is called "negative screening," which excludes companies that seem to have problems with their business content from investment targets. Companies and businesses that are forced to manufacture weapons and work for children, companies that engage in tobacco, alcohol, gambling, etc., and their industries are also excluded.

Next is the "ESG integration type," which is a method of making decisions and investing based on ESG information as well as existing financial information. Next, in light of international norms such as "engagement/exercise of voting rights" that encourage companies to engage in ESG from the standpoint of shareholders (or future shareholders), environmental destruction, and human rights violations, the minimum standards are not met. The main method is "international norm screening," which excludes companies from investment targets.

In addition, "positive screening" to invest in companies with high ESG-related evaluations in the same type of industry, "sustainability theme investment" to set social and environmental themes and invest in related companies, social There is a method called "impact community investment" that emphasizes impact and environmental impact.

ESG attracts attention due to its high affinity with SDGs

ESG investment is also closely related to SDGs (Sustainable Development Goals). The SDGs, which were agreed and adopted by all 193 countries at the United Nations, set 17 goals such as eradication of poverty, reduction of disparities, and climate change countermeasures that we would like to resolve by 2030. This also overlaps with the “ESG investment” index. Companies not only gain new business opportunities by tackling the social issues listed in the SDGs but also have the potential to obtain “ESG investment” from investors by being evaluated for their efforts.

The merit of “ESG investment” for one investor is that stable long-term investment can be expected. The environment, society, and governance that potential investee companies work on are not temporary, but permanent. It is unlikely that you will choose from “ESG criteria” for management that prioritizes profits or for entering a business that is affected by economic conditions, and the risk of scandals that significantly reduce corporate value will be low.

And investing in such companies means supporting companies that excel in "ESG" and work on solving social issues through "SDGs". The fact that investing in a company contributes to society is also attractive to investors. Although there are disadvantages such as low short-term returns, ESG investment has ample potential for growth in the future.

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