Of late, investors have begun to realize and take into account the impact that a company has on the environment and society at large. This realization has prompted many investors to redirect their focus from financial returns and profits to other equally important aspects such as the company’s environmental impact, societal impact, and governance practices.
This shift in focus has led to a new form of investing known as ESG investing, which is slowly gaining traction. Want to know what ESG investing is and what ESG stocks are? Read on to know everything about this new phenomenon.
The letters ESG stands for Environment, Social and Governance. ESG investing is basically a form of investing that aims to be more socially responsible by prioritizing a company’s impact on the environment, the society, and its governance practices, along with its return generating potential.
ESG stocks are essentially those companies that adhere to strict and high standards of corporate governance, are responsible towards the environment, and address issues relating to its employees and the society at large. Any company that satisfies the above criteria are termed as ESG stocks and investing in ESG stocks is what is widely referred to as ESG investing.
Focusing on ESG stocks can provide investors with a host of benefits. Let’s take a brief look at a few of them.
1. ESG investing reduces risk
One of the primary advantages that you get to enjoy by investing in ESG stocks is a lower amount of portfolio risk. Companies that focus on these three elements - Environment, Social and Governance tend to be far less volatile with lower downside risks compared to entities that don’t focus on these issues.
2. ESG investing can lead to high returns
Another result of focusing on ESG stocks is that you get the ability to earn higher returns on your investment. There have been considerable amounts of research that has proved that companies that focus on ESG tend to generate higher returns than companies that don’t.
3. ESG stocks generally have strong leadership
Companies with a strong focus on ESG usually tend to have a strong and capable leadership. Such companies generally do well in the long-term thanks to better decision making.
4. ESG investing promotes ethical companies
An indirect advantage of ESG investing is that it has the ability to promote ethical companies. When a large number of investors resort to evaluating companies based on environment, social and governance aspects, the companies are also likely to act more ethically and responsibly.
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