ESG Investments: Will ESG be the Future of Finance?

This report delves into the realm of Environmental, Social, and Governance (ESG) investments, examining their definitions, factors, and appeal within the investment landscape. It explores the environmental, social, and governance factors that companies are evaluated on and the increasing interest of socially conscious investors, particularly millennials. The report highlights the advantages of ESG investing, such as competitive returns and diversification, while also addressing its disadvantages, including challenges in portfolio construction and potential impact on returns. A literature review is provided, summarizing existing research on ESG integration into valuation models and the performance of ESG-based investments. The report concludes by considering whether ESG requirements can assist companies in maximizing shareholder wealth, presenting an argument in favor or against the view that ESG Investments would become the future.

ESG
• E N V I R O N M E N TA L
• S O C I A L
• G O V E R N A N C E

DEFINITIONS OF ESG
 Environmental, Social and Governance
(ESG) is the set of criteria or standards
that company follows.
 Socially conscious investors invest
after analysing the company’s
operation based on the ESG standards.

FACTORS OF ESG
• Environmental factor of ESG refers
the behaviour of the company on
environmental issues.
• Social factors refers to the
company’s behaviour towards its
stakeholders.
• Governance factor refer to the tax
strategy, governance policy and
company structure of the company.

APPEAL OF ESG IN
INVESTING
 Socially conscious investors mainly
interested in the impact of the
investments in the environment.
 As per a study made by Cone
Millenial Cause Study, the millineals
are mostly reluctant to purchse a
company’s product when the
company holds goodwill in the
market.

A D VA N TA G E S O F E S G
I N V E S T I N G
 Competitive Returns: As per Oxford University
and Arabesque Partners (2015), ESG quality of
the company assists them to enjoy the
competitive advantage. This in future will
increase the company’s performance and thus,
the shares of the company will also be in bear
mode. It is evident from Coca-Cola Company
who successfully improve their ESG quality and
produced superior performance that assists
the company to improve their financial health.

DIVERSIFICATION: It is
often observe that
investors struggle to
implement the ESG
standards in the
investment strategies
without immolate the
diversification. To mitigate
such problem the
investors can include the
stocks of the companies
who holds high ESG
profiles in their portfolio.
In this way the investors
can bring more systematic
way to implement the ESG
in their investment
strategies.

DISADVANTAGE OF ESG
INVESTING
 The implementation of ESG
factors in the portfolio
construction is quite a
concern.
 In some cases it can be seen
that ESG investing can
diminish the return.

LITERATURE REVIEW
 As per Willem Schramade, ESG factors are
systematically fed into the valuation models.
As per the author most of the ESG approaches
fails to enter in the system, which on the other
hand, affects the company’s financial position.
 As per Benjamin A. Auer, the ESG based
investing in companies from Asia-Pacific
region and United Kingdom offers same kind
of performance as similar to the non-based
ESG companies.

CONCLUSION
The investments in ESG-based companies
may not perform similar to the non ESG-
based companies. In many instances it can
be seen that the performance of non ESG-
based companies performed well in
comparison to the ESG-based companies.
Thus, it can be concluded that ESG
requirements may not assist the
companies to maximize its shareholders’
wealth.

REFERENCE
• Auer, B.R. and Schuhmacher, F., 2016. Do socially (ir) responsible
investments pay? New evidence from international ESG data. The
Quarterly Review of Economics and Finance, 59, pp.51-62.
• Schramade, W., 2016. Integrating ESG into valuation models and
investment decisions: the value-driver adjustment approach. Journal of
Sustainable Finance & Investment, 6(2), pp.95-111.
• Impact, S. and TASKFORCE, I., 2014. Impact investment: The invisible
heart of markets.
• Us.rbcwealthmanagement.com. (2020). [online] Available at:
https://us.rbcwealthmanagement.com/documents/170410/170426/18-
WG-774_Etergino+Group_Benefits+of+ESG+Investing+Flyer_evite.pdf/
2f645a56-155e-4b55-8bc2-3e1a61fc84b6.
• Top1000funds.com. (2020). [online] Available at:
https://www.top1000funds.com/wp-content/uploads/2011/08/Integrating_
ESG_into_the_Investment_Process_Aug_2011.pdf [Accessed 4 Feb. 2020].