Understanding ESG and Sustainable Investing:
Believe it or not, you often use the two important terms, ESG investing and sustainable investing, interchangeably. But they actually convey two different meanings. Let's clarify what ESG (Environmental, Social, Governance) and Sustainable, also called SRI (Sustainable, Responsible, and Impact) investing, convey.
Various big investment houses put a lot of effort and funds into publicizing ESG investing and try to judge a company or business' responsibility levels by using ratings based on some numerical data and metrics. They, quite often, do not follow any particular level or quality, because the metrics keep varying from time to time. The essence is that these ratings portray the potential impact of the environment on the business and not vice versa.
Now, what do we understand about the difference between them?
Overall, the idea behind ESG investing vs. sustainable investing is that ESG focuses more on aligning the financial goals of the company with environmental and social well-being, and sustainable is a broader term that looks at designing the business model in such a manner so that they are more legitimate and endurable, making financial goals secondary. It's just that ESG depicts a business less negatively, and sustainability depicts how a company is successfully making a positive impact on the environment.
Example:
If you wish to include a stock or a fund in your portfolio that encourages ESG investing by reducing your holdings in a chemical company and increasing your holding on a company investing in green energy, you first need to confirm whether the stock belongs to a company that is sustainable in the future.
However, it is difficult to confirm that. We can also say that ESG judges how and to what extent the various environmental and social risks impact the business and accordingly selects it as a part of our investment portfolio, but sustainable investing encourages the growth of the business for the purpose of bringing in social change in the long-term.
Standards for judgement:
There is definitely a lack of proper standards regarding ESG investing vs. sustainable investing. But one thing is clear. Investors are increasingly making purchase and investment decisions based on how well a company is adopting social and environmental risk mitigation approaches, so ESG is basically one step above selecting companies that simply exclude negative impact. It goes into critically exploring the rise in positive social impact of a business.
Sustainable investing, however, will include all of the above and also putting moral values above financial considerations. It includes selecting companies for investment and screening based on business type, which may sometimes affect the return of the investors.
Conclusion:
The topic of ESG investing vs. sustainable investing is an interesting one. However, investors should look for ESG and sustainability while selecting investment companies, promoting the creation and expansion of new products and services that support justifiable regulations and policies.
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