Green Finance: The Rise of ESG Investments
- Kimi Basamak
- Jan 12
- 4 min read
Introduction to ESG
Environmental, Social, and Governance metrics and deliverables have become more and more prevalent over the last few years. Investment into these sectors of business is no longer a new trend; it has evolved to become a strong indicator of the operation of a business, showing how capital is reallocated and how legislation from governments is shaping business structures.
This new ESG craze is based on the idea that future business performance could rely significantly on sustainability of production and management, especially as factors like climate change and corporate practices are more heavily criticized by news outlets and shareholders who demand changes to align with new ESG goals.
Over the last decade, the GSIA reports a 13 trillion dollar increase in ESG assets, and ESG funds make up around a quarter of managed assets in the US. All this investment is a growing combination of more interest and growth in ESG markets along with new priorities of investors to change corporate behavior toward sustainability instead of profits.
“E” - The Environmental Factors
The most important focus of businesses on the environment is climate change, specifically on minimizing their carbon footprint during their production, transportation, and corporate operation. These goals are mainly for companies that produce products and manage various production facilities overseas.
Efforts like the Global Carbon Project have been implemented, but even with large corporate investment into combating climate change, increases in emissions are still being reported.
Because of this, investors, customers, and governmental bodies are putting more pressure on companies to meet specific quotas and budget restrictions to accelerate their environmental improvements.
A notable new ESG investment trend are green bonds, which are being issued more and more frequently. These bonds, whose value is expected to reach $2 trillion by 2025, fund environmental projects, particularly renewable energy and energy efficiency. Governments like the EU are also announcing commitments to issue green bonds as part of their environmental programs.
These new initiatives are not without drawbacks – companies are now practicing “greenwashing”, where they falsely claim environmental impact and initiatives to try and fit the ESG trend without sacrificing profits. These tactics by businesses slow the environmental transformation, and because of this governments are increasingly strict on corporate behavior, potentially leading to large-scale economic stagnancy.
“S” - The Social Significance
Recently, there has been emphasis placed on diversity and inclusion criteria in business hiring. This, coupled with labor practices and worker rights, make up the social changes investors want in business. Human rights protests and worker strikes have seen a rise in recent years as a response to new technological trends and regulation. Some examples are the film industry strike as a response to AI-generated content and the Starbucks barista strike arguing for better pay and conditions.
Diversity in the workplace has been put under a microscope by investors recently, as new studies by McKinsey and others are trending toward a correlation between diversity and corporate profitability.
New customer purchase trends are also dictating social initiatives from corporation. According to Nielsen’s 2023 study, around three quarters of consumers are willing to pay more for products and businesses that support ESG and ethical practices. This shift toward conscious consumerism is forcing companies like Nike and Amazon, who have been under scrutiny for labor practices, to change their social policies.
“G” - New Governance Shifts
New changes are also being made to corporate governance, specifically in the areas of board diversity, shareholder powers, and compensation structures for company executives. Shareholders in particular are demanding more accountability from corporations, including enforcement of various shareholder rights and more decision-making power.
More and more investors are also considering other aspects of governance when making decisions, instead of only company performance as a whole. Specifically, board diversity and compensation are being used as evaluators of the credibility of the company. For continued growth, more and more companies are prioritizing the blend of social and governance factors to develop more diverse leadership. This ties into the idea that a more diverse board will maintain the direction of the company and provide more stability in the long-term.
While more diverse structures are implemented throughout corporations, the compensation structures are relatively stagnant, with higher-ups receiving disproportional salaries in comparison to base workers. Although justifiable to some degree because of the more significant responsibilities of these executives, unbalanced compensation has been a major cause of many worker and labor strikes.
What Does ESG Entail?
ESG does not appear to be a passing trend, but a large-scale shift in both corporate and investor behavior. New challenges like climate change, worker rights and unions, and governing balance create a higher standard for responsible investing.
Now, intelligent investing has slightly shifted away from the trends and financial data; it now encompasses the personality and ethical responsibility of the company as a whole. New investors and government are embracing ESG principles, helping corporations become more sustainable, transparent, and most importantly, profitable assets.
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