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ESG assets show the way forward in investments

As the spectre of climate change looms over the planet, investors are increasingly looking towards environmental, social and governance (ESG) investing in striking a balance between returns and taking positive action.

According to a recent PwC survey, which Nasdaq cites, effective corporate governance and the need to minimize greenhouse gas emissions are two of investors' top five concerns when it comes to ESG problems. According to a study by Deutsche Bank, "more than half of investors (53%) now consider climate change to be the most significant factor influencing their investment decisions, up from 47% last year.

ESG assets now have a value in the trillions of dollars in only a few short years. In a recent analysis, Bloomberg predicted that they would reach a staggering $53 trillion by 2025. Companies may put their money where their mouth is by using green bonds, social bonds, sustainability-linked loans, and comparable products, which provide them access to a wider range of investors and even more affordable finance.

This suggests that including ESG in an investor's portfolio will continue to be beneficial. According to a McKinsey survey, over 70% of investors believed that ESG rankings and financial returns were positively correlated. Businesses who show dedication to ESG have seen profits increase 9.1% over the previous three years, according to accounting firm Moore Global.

According to equities index provider MSCI, the ESG and climate environment saw a seismic upheaval in the previous year. The war in Ukraine, disruptions in the energy market, rising interest rates, and soaring inflation have all combined to produce a global cost-of-living crisis and renewed geopolitical and macro uncertainty, while regulators are upping the ante on everything from greenwashing to stricter climate target disclosures. As Meggin Thwing Eastman, MSCI's Global ESG Editorial Director and ESG Research Director, EMEA noted, "it's easy to see why investors have tended to tread cautiously as they seek to understand companies' challenges and opportunities. Add to the mix a spate of climate-induced disasters and the increased centralization of ESG investing.

Investors will encounter a number of important ESG challenges in 2023, according to MSCI. The environmental repercussions of the conflict in Ukraine, market circumstances that may put investors' commitment to addressing climate change to the test, regulatory demands on ESG funds, the impact of deforestation on firm balance sheets, and other factors are among them.

Therefore, how can one choose the best ESG stock to effect change? Some thoughts are provided by Rebecca Cattlin, Financial Writer for

“Socially conscious investors evaluate stocks that are both profitable and align with their beliefs about corporate behavior within a company – such as attitudes toward gender and ethnic diversity – as well as the effect the company has on the wider environment, such as its carbon footprint, ”she says.

The primary challenge to the ESG investing movement is "greenwashing," or firms' propensity to claim that their goods and services are more in line with ESG standards than they actually are. ESG criteria are currently not really measured, making compliance enforcement unfeasible. Additionally, it's critical to industry-select your stocks because it's feasible for unethical businesses to perform well on ESG measures. For instance, a defence company that manufactures guns might do well in terms of waste management or diversity and inclusion, but it might not be an industry you would want to invest in if you were anti-gun use, says Cattlin.

There are two main routes to trading ESG companies: ESG stocks and the ESG index.

ESG equities are the stock of businesses that actively work to comply with ESG standards. The company's operations and internal rules, which must protect the environment, workers, communities, and shareholders, are equally as important as its goods and services.

Most traders and investors will use ESG rating companies like MSCI and Sustainalytics to examine a stock's performance history.

The top 100 US-listed environmental, social, and governance stocks are monitored by the ESG index. It is based on the Arabesque S-Ray score for each company.

Similar to trading any stock index, trading the ESG index involves taking a single position that gives you exposure to a group of shares. The ESG index, however, is for shares of ethically sound companies rather than being from a particular exchange, like the FTSE 100 for the London Stock Exchange or the Dow Jones for the US equities markets.

Even if you’re not a socially conscious investor, ESG investing is still a trend worth taking note of. “It will impact the profitability of companies over the long term, and impact the market’s perception of a stock. This could cause fluctuations should a company announce new ESG policies or go against existing ones,” says Cattlin.

(Source : Khaleej Times)

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