Future-Focused Investment Prospects: Incorporating Environmental, Social, and Governance Factors for Long-term Financial Success
In a guest article for Hedge Funds in AlphaWeek, published by The Sortino Group, Peter B. Kellner, Founder and Managing Partner at Richmond Global Compass, discusses the growing importance of Environmental, Social, and Governance (ESG) investing and its sister approach, impact investing.
As companies generate most of their value from intangible assets compared to companies of the past, the adoption of ESG investing is driven by the clear advantage it offers in terms of risk mitigation and business opportunities. Material ESG metrics, such as those focusing on revenues, costs, or cost of capital, are crucial for ESG investing and affect both risks and business opportunities.
ESG funds invest in companies based on their ESG practices, emphasizing sustainability and ethical business conduct, while aiming for competitive financial returns. On the other hand, impact investing funds, a subset of sustainable investing, specifically seek measurable positive social or environmental impacts alongside financial returns.
The key difference lies in their focus. While ESG funds primarily evaluate companies through ESG criteria to manage risk and identify opportunities, impact investing funds intentionally prioritize investments that generate direct, measurable social or environmental benefits in addition to financial gain.
Both approaches contribute to shareholder value by identifying companies with strong sustainability practices that reduce long-term risks and capitalize on emerging growth opportunities. This can enhance financial resilience and performance over time. Impact investing adds value by creating positive change that can open new markets or improve societal conditions, potentially leading to sustainable financial returns by addressing global challenges.
In summary, ESG funds and impact investing funds offer distinct but complementary strategies for investors. ESG funds focus on companies with strong ESG ratings, aiming for competitive financial returns, while impact investing funds prioritize investments that generate direct, measurable social or environmental benefits alongside financial gain.
As investors continue to understand the value of incorporating ESG into their investment process, they are expected to seize the opportunity to drive planetary sustainability through the allocation of global public capital. ESG investing offers a more complete view of companies and assets and is inherently connected to fundamental investing. It is an integral part of the investment process, focusing on non-financial and certain financial metrics that impact shareholder value.
For more information about reprints from AlphaWeek, click the link provided. The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.
[1] ESG Funds [2] Impact Investing Funds [3] Risk Mitigation and Business Opportunities [4] Material ESG Metrics [5] Shareholder Value
- Investors who choose ESG funds are driven by the belief that these funds offer a clear advantage in terms of risk mitigation and business opportunities, as they evaluate companies based on their ESG practices and aim for competitive financial returns.
- Impact investing funds, a subset of sustainable investing, go a step further by intentionally prioritizing investments that generate direct, measurable social or environmental benefits in addition to financial gain, offering an opportunity to create positive change leading to sustainable financial returns.
