The Growing Importance of ESG Investing

A Brief History of ESG Investing

The history of ESG investing is closely intertwined with the history of SRI investing. However, the two concepts are not the same. ESG investing is a more recent development and has a different focus than SRI investing. Understanding the difference between the two is important for any investor who is interested in incorporating environmental, social, and governance factors into their investment decisions.

ESG Investing with Susana Carillo

The roots of ESG investing can be traced back to the 1960s and 1970s when several environmental catastrophes in the USA – such as the Santa Barbara oil spill and the Cuyahoga River fire – brought public attention to the need for more responsible environmental practices.

In response, a group of concerned citizens formulated what became known as the “triple bottom line” approach to business, which considers environmental, social, and financial performance.

This approach began gaining traction in the business world in the 1990s. By the early 2000s, some institutional investors started incorporating ESG factors into their investment decision-making processes. The term “socially responsible investing” (SRI) was first coined in the early 1970s by a group of investors interested in contributing towards social change.

The SRI movement gained momentum in the 1980s as more and more individuals and institutions began integrating social and environmental considerations into their investment decision-making.

Today, there are several different approaches to SRI. Still, they all share a common goal: to use investment capital to create positive social and environmental change.

How SRI Differs from ESG Investing

While SRI and ESG investing both take into account non-financial factors, there are some important distinctions between the two approaches.

The most significant difference is that SRI tends to focus on negative screening, meaning that investors avoid companies that they believe are causing harm to people or the planet. In contrast, ESG investing primarily focuses on positive selection, meaning that investors seek out companies making a positive impact. 

More and more companies are changing their baseline indicators for determining success and good business practices. The growing global climate crisis and the COVID19 pandemic are important drivers forcing companies to re-think their business models and operate in the right direction: a conscious balance between making profits and creating sustainable societies. 

In addition, more research is exposing the setbacks of the “capitalist system” and the need to rethink how governments and private sector interact so that positive needed changes are brought to people and the planet.  

Another key difference is that SRI is often driven by moral or ethical considerations, while ESG investing is typically motivated by a belief that companies with substantial environmental, social, and governance practices will outperform those without such practices over the long term. 

Finally, it’s worth noting that SRI has a longer history than ESG investing. There are several well-known SRI indexes, such as the Dow Jones Sustainability Index, that investors around the world follow. In contrast, ESG investing is still in the early stages of development, but more benchmarks are being developed. 

In recent years, ESG investing has continued to grow in popularity, with an increasing number of individual investors expressing interest in investing in companies that align with their personal values and that are consciously contributing to address global challenges. 

Research has shown that ESG-focused companies tend to outperform their counterparts over the long term. One study found that between 2010 and 2016, companies with strong ESG ratings outperformed¹ those with weak ESG ratings by 2.5 percentage points per year, on average.

ESG investing has come to be known as a type of SRI investing. However, there are some important differences between the two. ESG investing is focused on the environmental, social aspects, and corporate governance of a company’s operations. There are several reasons why you might want to consider investing in ESG funds.

Ms. Carrillo believes investing in companies focused on environmental, social, and governance issues will contribute to re-imagining a different world while supporting those who could become real actors and changemakers.

Evidence has shown that ESG-focused companies tend to outperform their counterparts over the long term. Finally, investing in ESG funds can help to diversify your portfolio and provide you with exposure to a wide range of companies and industries. If you’re looking for ways to invest in businesses that are making a difference in the world, then ESG Funds could be an excellent option for you.

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