ESG investing: Yet another trend ?

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Environmental, social and governance factors refer to industry’s key issues such as climate change, human capital and labor management among others. These factors’ significance is constantly growing amongst both institutional and retail investors.

The genesis of ESG investments goes back to the sixties during a socially responsible movement with some investors completely excluding entire industries or stocks from their portfolios because of the political policies of some regimes or business activities such as tobacco.

Nowadays, in a world where data and analytics are continuously revolving and the need for transparency critical, the ESG term is considered by many as an umbrella for investments seeking both positive returns and long-term impact on society and is used to evaluate the corporate behavior of a specific company. The debate around these factors and their correlation to performance is more than ever a hot topic and many studies demonstrate how the institutions committing to ESG practices display a lower cost of capital while those who performed poorly on ESG have higher cost of capital and higher volatility due to constant controversies.

 

It appears that investors and businesses are taking up the banner on those issues where political actors have failed. The number of American investment products with ESG criteria has compounded by 29 percent a year since 2010, including mutual funds, ETFS and Variable Annuities according to the US SIF foundation, and they are gaining increasing market shares from year to year.

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