What Is ESG Investing and Why Does It Matter?

Covid-19 amplified global challenges, making sustainability practices a central concern for company board members, policymakers, and executives. ESG investing, in particular, has become a growing trend in a variety of industries.

Before you ask, no, ESG is not a fad or a “feel good” exercise. Rather, it is an important element of strategic investing that mitigates risks while opening doors to new opportunities.

Investors and stakeholders of all ages are particularly interested in investing in companies that consistently observe ESG policies. Asset management companies have no choice but to follow the same approach. But before we dive in, what is ESG?

ESG stands for environmental, social, and governance. ESG investing is the practice of investing in companies that regularly integrate ESG metrics in their processes as indicated by independent rating agencies. Let’s discuss the three ESG elements in detail.

Environment

Climate issues are a primary concern for modern investors and consumers. They worry about the amount of carbon and chemical waste companies emit, the amount of energy used, and the prevailing sustainability approaches to remedy the situation.

Even if a company does not produce waste, investors will still want to know about the efforts it is making to make the environment safer for current and future generations.

Social

The social element of ESG is a broader aspect that investigates the social impact of a company, both internally and in its outward-facing approach. Some of these social issues include employee retention, diversity and inclusion, human rights policies, workplace violence policies, stances on labor rights, community investment, customer satisfaction, and many other issues.

Governance

The governance factor looks at the rules and practices that a company adopts to govern itself. These controls should help improve decision making when dealing with employee, customers, stakeholders, the community, and the environment.

The Benefits of ESG Investing

Even if you are still skeptical of ESG, there are some real, tangible benefits to keep in mind, including:

1. Top-Line Growth

A company that prioritizes strong ESG policies can both expand into existing markets and enter new ones as well. Why? Better practices win the trust of governing authorities, which can speed up the timeline for acquiring new licenses and approvals. This leads to unhindered growth.

2. Cost Reduction

Water, energy, and carbon usage all have expenses attached. When a company ramps up its sustainability efforts, like re-engineering the production process, recycling, tackling energy consumption, or reformulating its products, the production costs reduce considerably.

3. ESG Investors Are After Long-Term Value Investments

ESG investors (mostly high net worth individuals) are rarely interested in what happens in the next quarter. They understand that real change takes time and do not mind waiting. Businesses that stick to sustainable practices are likely to attract high-value investors.

4. Braving Competitive Hurdles

Admittedly, it is hard to measure the competitive advantage that ESG policies bestow on a company. However, that does not make them any less important. This begs the question: how does ESG improve the competitiveness of a brand?

A?study ?by IBM indicates that consumers increasingly prioritize companies that observe sustainable practices and good governance. Moreover, these environmentally conscious individuals are willing to pay a premium to buy from brands that have strong ESG policies.

How to Apply ESG Principles to Your Company

There are several steps involved in implementing ESG principles in your organization. These include:

Step 1: Conducting a Readiness Test

The goal of this step is to identify if your company is ready for ESG. The readiness test will examine monetary resources and the traits of your existing leadership.

The readiness stage also explores the risks and opportunities of ESG efforts as well as a plan for when performance will be revised. Lastly, during this first step, it is imperative that companies decide who will lead ESG programs and what the reporting structure will be.

Step 2: Setting up a Governance Structure

Once you have conducted a readiness test, the next step is to set up a governance structure. This foundational exercise establishes the individuals or committee in charge of your company’s ESG initiative. These individuals must possess adequate knowledge regarding sustainable investing.

An ESG committee should include senior leaders, integrate investor/stakeholder perspectives, detail the reporting period, and (most importantly) meet regularly to discuss progress and enact strategic adjustments.

Step 3: Conducting Data Inventory and Governance Practices

With the right committee in place and roles assigned, the next milestone looks at data inventory and governance practices. This section ensures that the data collected is accurate and will result in the best decision-making process.

Individuals tasked with data assessment should have proper project management skills and (ideally) sufficient ESG knowledge because they will need to educate stakeholders and other invested parties about data processes and participate in generating accurate final data reports.

Step 4: Deciding on the Information to Disclose

Once ESG leaders have completed the inventory process and implemented the right tools for collecting and validating ESG data, the next step is to decide what information to disclose. This will take into account stakeholder and investor priorities.

Companies have no requirement to share every detail of their ESG report. This is because some disclosures bear considerable risks. If this is the case for your business, it is important to identify the legal benefits or risks incurred from the disclosure.

How DataArt Can Help

Linking ESG Feeds to Existing Systems

Effective ESG investing revolves around ESG data, which must be delivered in an organized and unified way to be of use. This information contains a company’s sustainable practices such as employee treatment, eco-friendly policies, risk and credit ratings, social stance, and much more.

When choosing a firm to invest in, it is imperative to collect ESG data. Luckily, for some time now, the process of selecting the right companies to invest in and the potential ROI calculations is automated. The same applies to portfolio assessments and deal closings.

DataArt can help by configuring a company’s system so data is exchanged fluidly with the rating agencies that oversee ESG certification. Still, the problem is that the data you will receive from some agencies will be loose and unstructured.

The next best option is to use an independent firm that has a streamlined method for assessing companies based on their qualitative and quantitative ESG metrics. In these cases, DataArt can be a reliable partner by processing ESG feeds and accessing data from rating agencies, as well as pooling it into company warehouses so that it can be used to make investment decisions.

Re-Engineering Reporting Systems to Account for ESG Factors

ESG factors can be hard to read. But it is imperative to add them to annual sustainability or board meeting reports. The good news is that DataArt can help companies compile their ESG data so that it is reflected in the investment process.

Some organizations use DWH-based reporting to see how ESG components affect the overall performance of portfolio/stock prices. These systems are often ineffective. DataArt can re-engineer reporting systems to accurately show the impact of ESG elements on the company’s bottom line.

Incorporate Machine Learning to Improve Qualitative Analysis of Published Data

ESG data is sometimes unstructured, making sorting it out a time-consuming and error-prone process. DataArt’s team can incorporate?machine learning ?capabilities (including Natural Language Processing) into systems to speed up the structuring and validation process, so a company can operate with relevant and well-organized data.

Conclusion

ESG investing is a strategic business approach designed to help companies remain competitive and productive in the long run.

Trust and ESG go together. Brands that prioritize ESG will be supported by their investors and stakeholders. Furthermore, the fact that ESG helps mitigate risks can put executive and board members at ease.

When putting together an ESG program, make sure to include the decisions of investors, board members, and other senior executives. When it comes to building effective data reporting and management frameworks, make sure to work with seasoned software providers like DataArt.

Originally published here .