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ESG stocks are the stocks that come with high Environment, Social, and Governance ratings. These stocks support those organizations which have considered long-term sustainability as an integral part of their operations.
ESG stocks also acknowledge the risks of unintended outcomes if a specific company fails to take the ESG factors into account.
Put differently, ESG stocks are considered to be highly sensible by investors.
Let us explore what makes them a “sensible investment”.
While it is sometimes considered a goodwill gesture from the investor’s side, it plays an essential role in making a company successful and maintaining its results. So, integrating ESG with stock analysis holds a lot of importance.
Contrary to what many people think, investing in ESG stocks will not always result in lower returns. So, investors need not think of them as a goodwill gesture in all instances. ESG strategies, in a few cases, have proven to beat the usual market statistics.
Investing in a socially responsible manner is not only great from the investor’s side in terms of the company’s profitability over a given period. But it is also favorable for employees who are perfectly aligned to work with values that are environmentally and socially sustainable.
If you are thinking about entering the stock market or expanding your investment portfolios in a sustainable environment, then ESG stocks are your solution. These stocks have a strong record of social, corporate, and environmental responsibility. They carry out the operations sensibly to help you reach your financial goals, even during a recession.
Evaluating an ESG stock
Consider the following facts while evaluating the strength of an ESG investment –
Environmental– It includes all the actions taken by companies on issues such as pollution (including all types of water, air, land, and noise pollution from factories). It includes the usage of environmental-friendly products that are organic and cause less pollution to the surrounding. It also includes how a company’s operations contribute to land conversions, waste generation, disposals, and excluding activities that would include extraction of fuel, palm oil, growing tobacco, etc.
Social– This one consists of community outreach and support and the labor conditions involved in the whole supply chain. It also considers workplace diversity and how the same is encouraged during the selection process of employees. It also includes the retention or promotion process, gender aspects, community health, and safety management. The process should exclude things like gambling, usage of controversial weapons, alcohol, etc. For example, a company’s usage of conflict minerals illustrates the importance of supply chain working conditions.
Governance– This one includes factors related to the company’s governance like the composition of the board of directors, policy transparency, codes of ethics applications, grievance mechanism, anti-corruption provisions, adherence to company values, and many more.
Apart from these, a company with good ESG ratings have a better working condition for their workers. It includes arranging a healthy environment for the employees to work, along with banning child labor in any form.
When a company follows environmentally sustainable policies, has a good social presence, and is equipped with clear governance set-ups, it is bound to thrive over the passing time. They might get tax benefits in a few cases and experience long-term profitable financial returns.
Companies with strong ESG ratings are flexible and aware, which means they can easily adapt to changing times. They can take proper advantage of all the regulations properly aligned with the ESG factors. For example, a company using renewable energy would be more appreciated than another similar company using non-renewable fossil fuel. This holds more truth when the world around us is adopting a sustainable way of existence.
Companies that have a good ESG track record get the investor’s attention as they can instill that faith in them. It will be on the rise as the new generations, who are slowly becoming investors, are more environmentally conscious. The better overall conditions of a company with a high ESG rating attract stakeholders to shift their focus.
Therefore, if you are an investor who wants to get high financial returns from a company that is environmentally and socially responsible and has good overall governance, then ESG stocks are indeed your best shot. In this way, you can earn while caring for the environment and people.