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  • Writer's picturePatricia A. Stewart | CFA

Why It’s Important to Consider ESG When It Comes to Investing

Investors choose individual equities to either invest in, or ignore, for any number of reasons. Some people will invest in tobacco or military stocks while others won’t for ethical reasons. When it comes to creating long-term value, more and more investors are taking a closer look at more than what a company does; they’re also looking at non-financial aspects of a stock’s performance, like environmental, social, and governance (ESG).

Everything You Need to Know About ESG Investing

What Is ESG Investing?

While investors are paying attention to ESG, some investment managers are not, and it’s a costly mistake. ESG covers a wide variety of topics that are applicable to businesses that operate in every sector and industry in one way or another.

Environmental issues include climate change, greenhouse gas emissions, resource depletion, waste and pollution, biodiversity, deforestation, and water and energy efficiency. Social issues include working conditions, human rights, equal opportunity, employee diversity, health and safety, and philanthropy. While governance issues can include business ethics, executive pay, board diversity and structure, and political lobbying and donations.

ESG investing is a way of investing sustainably, that is, taking both a company’s financial strength and how it incorporates the environment and our wellbeing into consideration. The two notions are not as disparate as they seem. That’s because businesses are being increasingly affected by social and environmental factors.

Case in point, in recent years there has been a significant increase in ESG investing as investors recognize the interconnectedness between economic, social, and environmental issues. The COVID-19 pandemic is an excellent example.

The shutdown of the global economy and ongoing uncertainty led many investors to turn to ESG investing and ESG funds to bolster their portfolios. Over the first three months of 2020, $45.6 billion USD flowed into global ESG funds. And that’s just the beginning, more than $30 trillion sits in sustainable investment funds around the world. Over the next two decades that number could soar to $50 trillion.

As the ESG landscape continues to rapidly transform, it is important to understand the phenomenon of greenwashing. Greenwashing is defined as the act of making false claims or providing misleading information about how environmentally friendly something actually is.

Some may see ESG investing as something that is only popular during bull markets, but history shows that portfolios that incorporate ESG tend to perform better than those that don’t.

One survey found that over a 10-year period, 80% of equity funds that invested sustainably outperformed traditional funds. It also found that 77% of ESG funds that were around 10 years ago are still operating, compared with just 46% of traditional funds.

Sharp Asset Management for Your Retirement Planning

There’s more to investing than a company’s bottom line. ESG integration involves assessing the impact of ESG factors on companies’ long-term value. This may include analyzing their impacts on revenue growth, operating costs, earnings, valuations and performance. The sectors and geographies to which a company is exposed often determine which ESG factors are most influential to that investment. Overall, consideration of ESG issues is an important input to our security selection process and is integrated with our financial analysis to assess the merits of an investment.

If you live in Toronto, Mississauga, or anywhere in the GTA and are looking for a portfolio management firm or asset management company to help you build a diversified retirement portfolio designed to suite your investment goals, Sharp Asset Management can help.

Sharp Asset Management Inc. is an independent portfolio management firm that is 100% owner-operated. Since we are a highly concentrated group of professionals, we can respond quickly to changing market conditions.

Sharp Asset Management is not affiliated with any financial institution, securities firm, or mutual fund company. Nor do we earn any commissions or fees on investments we choose for our clients. That means our team of wealth management professionals is focused exclusively on helping you achieve your unique, long-term investing objectives.

To learn more about investing with Sharp Asset Management, contact us today.

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