The world as it is today demands businesses to be more responsible toward the environment and society that they function in. The concept of Environmental, Social, and Governance (ESG) investing, or impact investing, has thus gained traction over the last decade. Between 2012 and 2020, sustainably invested funds have more than tripled to $45 trillion globally. But what does ESG investing mean and how does it relate to growing your personal wealth? ESG investing means an investment strategy that puts equal emphasis on creating a positive impact socially and or environmentally and earning returns. Not only is this an expectation that is increasing at a rapid pace from consumers of companies and high-net-worth individuals, but it is also something that can truly benefit your personal financial planning strategy. Here’s how.
ESG investments tend to perform well
When looking at ESG investments as part of your personal financial planning
, it’s important to note that such investments aren’t just for a social cause but that they also tend to perform well. In fact, historically, ESG funds have outperformed their benchmark index. About 58.8% of sustainable funds have delivered higher returns than their peers over the 10-year period through 2019, as per Morningstar. The thing about companies that are ESG-oriented is that they tend to also focus on operational efficiency, optimum utilisation of resources, lower employee turnover, and better risk management. Such factors are beneficial for investors.
ESG investments hold up better during volatility
Along with returns, another factor you must look at when investing is how your investment will hold up during market downturns and ESG investments tend to hold up well. A study by MSCI shows that during the first quarter of 2020, the time when the pandemic broke out and the market sell-off began, three ESG indexes outperformed their benchmark index, MSCI All Country World Index ACWI.
ESG investments help reduce risk
Whenever you invest in the stock of a company, you have to consider the internal and external business environment risks. Every company is vulnerable to certain internal risks which can be specific to the industry, the management, etc. Supply-chain risks, for instance, were highlighted for almost all industries during the pandemic and still continue for many. When you invest in ESG-oriented companies, your overall portfolio risk is reduced because these companies have stronger and more transparent governance practices and business ethics.
So, ESG investing is not only something that will fulfil your corporate social responsibility criteria but will also be an added advantage in the way of enhancing your portfolio’s performance and hedging overall risk. To be able to make successful ESG investments, it’s best to seek financial advisory services that may form a part of the personal banking services offered by your banking institution. As a high-net-worth individual, when you look at personal banking,
you have to look at a private bank that offers you services such as ESG investing support so that all your financial needs can be met.