Environmental, Social and Governance (ESG) investing, also known as sustainable investing, is a strategy that investors use to invest their money in companies that practice habits that make the world a better place. And, interestingly, statistics show that, in the longterm, ESG-focused companies provide significantly higher financial returns than companies without an ESG focus.
This post briefly covers the history of ESG investing, why ESG investing makes sense, how Millenials are a driving force in this shift, and how AI / ML / NLP can help drive fast and accurate insights on ESG to enable the right investments.
History of ESG Investing
The practice of socially responsible investing was first introduced in the 1960s when investors began to exclude companies that practiced unethical behaviors such as tobacco production or involvement in the South African apartheid regime from their portfolios.
The recent pandemic has also shown that ESG stocks are actually more resilient during bear markets. According to a recent report by Morningstar, sustainable equity funds outperformed their peers during the initial phase of the COVID-19 pandemic last February and March. By mid-March, the returns of 66% of sustainable equity funds had ranked in the top 50 percent of their respective categories.
How Younger Generations are Influencing ESG Investing
By 2030, Millennials will inherit over $68 Trillion from their Baby Boomer parents, making them the richest generation in American history and when you combine this with the fact that 86% of Millennials are interested in sustainable investing, the drive for ESG investing is no surprise.
Millennials are driving sustainable investing because they are:
- Less connected with formal institutions, including a distrust of the media, large corporations, the government, and political and religious groups. Perhaps this skepticism plays a role in their desire to hold companies accountable to their public actions, rather than assuming corporations are acting with morals and values.
- More well-rounded in their education and have had a greater exposure to financial hardships than previous generations.
- More familiar with and have experienced more social and climate issues and believe they can influence positive change. Climate change, the gender pay disparity, diversity and inclusion within the workspace, carbon footprint, and supply chain issues are just a few of the issues that stand out amongst the Millennial generation.
Interestingly, a study by Cone Communications, showed that 87 percent of Americans said they’d buy from a company that advocated for an issue they cared about, and 76 percent said they would boycott if they found out a company supported an issue contrary to their beliefs.
Profits or Sustainability: Can One Have Both?
Until recently, business leaders have held the perception that one can have profits or sustainability, but not both. Historically, environmental products failed in the market as it provided low quality, expensive products which delivered low returns for companies. Today, this thought process has been reversed as analysis consistently shows that environmental sustainability-related operations improves resource efficiency, unlocks opportunities for process and logistics savings, and provides significantly higher financial returns.
This shows in the change of reporting of ESG data: 20 years ago, the Global Reporting Initiative launched its ESG guidelines, only a handful of companies disclosed their environmental performance. Today, 93% of the world’s largest corporations by revenue report ESG data and FactSet reported a 100% increase in S&P 500 companies citing ESG on earnings calls from Q1 to Q2 in 2020.
ESG Practices Yield Higher Returns: Is that True?
Analysis shows that ESG investing can yield equal or higher returns than traditional investments. There are several reasons:
- Improving operations and efficiencies through better management of natural resources like energy and water, as well as minimizing waste can result in significant cost reductions.
- Customers today are willing to research companies with sustainable products and buy from such companies, even if the cost may be slightly higher.
- Sustainable practices means companies can take advantage of regulatory and laws focused on sustainability, avoid fines and gain government support.
- Companies can attract talented employees, have better labor relations, and acquire a better reputation for a good place to work through their social credibility.
- Companies perceived to be sustainable can achieve higher valuations than companies with a lower social profile on sustainability.
ESG Funds Outperform Conventional Funds
Morningstar 2020 report, titled, Sustainable Funds Outperform Traditional Peers in 2020, found that 11 of 12 sustainable funds beat the S&P 500 index fund. Throughout 2020, despite the global pandemic, sustainable index funds had a positive yield.
Asset Managers Driving ESG Investing
Some of the largest and most influential institutional investors and asset managers are leading the powerful movement towards adding ESG standards to their investment criteria.
As leaders in capital, these financial institutions recognize the need to consider whether the companies they invest in today will maintain a strong relationship with customers and extended communities as environmental and social challenges increasingly impact the way we live and work. They also recognize that companies that commit to addressing social and/or environmental issues will experience greater business opportunities in the future, and will therefore achieve higher returns for long-term shareholders.
How AI/ML/NLP Drives Sustainable Investments
As demand grows for ESG investing, Artificial Intelligence (AI) along with Machine Learning (ML) and natural language processing (NLP) are vital to help investment firms gather fast and accurate insights on companies with strong ESG practices.
Without AI/ML/NLP, analysts may use information like investor calls or corporate social responsibility reports to track specific company practices. But, with the amount of unstructured data (news, blogs, social) available today and the speed at which it is generated, details that are critical to investment decisions can be missed. Information is vital, but deciphering the noise from relevant data remains a challenge and this is where AI/ML/NLP comes into play.
Insights from Alternative Data
Depending on only earnings calls, financial results, diversity and inclusion annual reports means a volume of useful information would be missed, and investors could end up making uninformed decisions. AI/ML/NLP can reveal hidden data to bring investors more insights into ESG practices.
With alternative data, investment practices are taken to a new level. Analysts can monitor more companies, find hidden but useful information, and share the insights gained from the information.
AI/ML/NLP also helps analyze the data pulled by attaching a sentiment score to the content, so that investors will know what to do with the information that is found. Whether tracking how companies perform long-term or looking at short-term controversies, alternative data is critical in calculating ESG scores and informing ESG-driven investment decisions.
Accern NoCodeNLP Platform
The Accern NoCodeNLP Platform empowers citizen data scientists, such as research and financial analysts as well as data scientists to use AI without having to code.
With four steps to accurate insights, citizen data scientists can achieve ROI in less than two weeks:
- Connect to pre-assembled data sources
- Select pre-built taxonomies
- Start the analysis with pre-trained AI/ML/NLP models
- View results in pre-integrated dashboards, DSML platforms and data warehouses
The powerful Accern platform also allows data teams to create custom ML/NLP workflows and bring their data, taxonomies, and models.