Benefits of Incorporating ESG into the Investment Process Essay Sample
The following essay sample work shall focus on the definition of Environmental, Social, and Governance (ESG) factors, issues in relation to the ESG, and benefits of ESG into the investment process.
ESG is known as Environmental, Social and Governance) factors are crucial which is an important part of an investment process. These ESG factors have no economic value which is used for the purpose of the analysis process to identify the risks and opportunities.
It measures the impact of investment and sustainability in a business or company that can determine the future financial performance of the company. It helps in managing the ethical, corporate governance, and issues of sustainability.
With the help of an ESG investing process, it gives a competitive advantage to the companies which have caused a positive impact on the environmental and social aspect of a business.
It encourages companies to make decisions in favor of the interests of the shareholders by creating a positive impact on the social environment. This category of the sustainable investing process includes value-based investing and socially responsible investing process.
Issues in relation to ESG
ESG is known as Environmental, Social and Governance issues must be considered by investor before making any investment decisions. Some of the risks that are associated with ESG are:-
These environmental risks are created by business activities that have a negative impact on air, land, water, ecosystems, and on human health. Environmental risks must be addressed by the company to reduce the risk of gas emissions, reduce water pollution, for better resource management, and for executing environmental reporting and disclosure.
The positive results related to the environment can be achieved by minimizing the environmental liabilities, reduction of litigation cost and risks, and increase in profitability.
Social Risks are the activities that create an impact on society and are addressed by the company for the promotion of health and safety, protection of human rights, management of relationships, management of labor, etc.
Addressing the results of the social risk in the increase in the level of employee productivity and morale, reduction of employee turnover and absenteeism, and an improvement in brand image and loyalty of the customers.
Governance Risks are the areas that require risk management, brand independence, and diversity that need to be addressed by the company with help of corporate governance activities. It increases the diversity and accountability of the board, protection of rights of the shareholders, and reporting and disclosure of the information.
Benefits of ESG into the Investment
- Companies incorporate the ESG practices into the investment process and in their long-term strategic planning to help the investors to communicate a prospective value. It improves financial performance by addressing the ESG issues.
A good sustainable ESG practice can improve stock, operational performance and lowers the capital costs in the majority of the companies. The companies with better sustainability scores show better operational performance and fewer investment risks.
- With the help of an ESG advocacy, the various environmental issues can be settled. It includes the reduction of greenhouse gases, setting up renewable energy sources and reduction in exposure to toxic chemicals, etc.
ESG helps in the development of strategic plans on agriculture, climatic change, and reduction of climatic risk exposure. Companies can track better and report on the climatic changes.
- ESG practices help in addressing the social issues of the gender pay gap, inequality of LGBT rights in the workplace, etc. It has helped the companies to include gender and racial diversity in the board members.
It has made companies more inclusive and engaging to implement gender identity, gender expression, and sexual orientation nondiscrimination policies which ensures smooth functioning of the organization.
It improves the portfolio of the company thereby pooling more investment in the future.
- Companies with the help of ESG have improved corporate behavior, governance, board ensuring diversity, political contribution transparency.
It has improved the appeal of the shareholders in the companies and has successfully made many companies improve their health, transportation, energy, financial, and manufacturing services.
Effective collaboration between investors, companies, and communities has generated sustainable business practices that have a positive impact on investment returns.
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The above essay sample has highlighted mainly the benefits of ESG in the investment process.
Business Management QQI Level 6, Supervisory Management QQI Level 6, Financial Management QQI Level 5, Accounting courses students can read this above management essay sample to gain knowledge on ESG practices.
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