Environmentally Sustainable Investing is a buzzword you may have been heard making the rounds recently. Chances are, you think that this some environmentally related cliché, which will die away by time. The truth is that it’s not, and for this reason I am writing this article to give you a primer, of something which will become bigger as time goes on. 

Starting with some context, we all know that for the last circa 200 years since the dawn of industrialization the human race has been polluting, and depleting the natural environment, at an increasing rate per capita, as the population has continued to grow exponentially. Through scientific, research and education, more generations, have started to espouse the idea that something had to be done. This, leads us to where we stand today, where the level of activism had increased, and it has become widely accepted, that there is the need to change our ways from top to bottom for the sake of ourselves and our environment. 

I will skip the part about the apocalyptic outcomes, of what would happen if we do not change, and jump straight into the matter at hand. The term ESG, stands for Environment, Social and Governance. The environment part is the easiest, which deals with the factors, including climate risks, resource scarcity and energy. The social aspect on the other hand deals amongst others with, human rights, diversity and cybersecurity. Governance, is related to ethics, transparency and the fight against corruption. 

Whether you are like most of us, and understand that the current situation is not sustainable for much longer, or still one of the few tin foil hat deniers, change is coming. Add, to that that the two largest asset managers in the world with assets under management in excess of eleven trillion dollars, have decided that ESG is the thing of the future, it is futile to stand in the way. Proof of this investing, with an added ESG, mandate has exceeded $30 trillion, greater than the market capitalization of the S&P500. 

Despite, its allure, the question that investors are going to ask is there, excess profit to be made by investing in ESG strategies. It is profitability that determines, how investors vote to allocate their capital. In this respect there is substantial evidence showing that, investing directed through an ESG strategy generates excess returns. 

There are different pieces of research, investigating ESG integrated companies, and mutual funds, which invest, on the basis of an ESG, mandate. The evidence indicates that over a period of ten years, investing in a portfolio, of highly ESG integrated corporations generated a slightly higher return, at a statistically significant, lower volatility. Further research shows, ESG, corporations, have lower betas, higher capitalization and price to book ratios.

In the long term this is a shift which is rooted in the concerns of society as a whole. For too long, businesses have pursued their profit maxim, at all costs. In too many cases, this was and is still being done at the expense of other stakeholders. Environments have been depleted, destroyed or damaged, people have been exploited and taxes evaded. Society at large is being driven towards greater accountability; it is only natural that the same is expected of corporations.

Disclaimer: Daniel Gauci is a financial advisor at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, views and opinions provided in this article are solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.