In recent years, sustainability and ESG investing have received more attention from mainstream investors. While it might seem like these two things are the same, they’re very different investment styles. Here’s how to know the difference between ESG and sustainable companies so you can make smart investments that help your portfolio grow while also impacting society and the environment.
ESG vs. Sustainability Companies
ESG companies have Environment, Social, and Governance policies in place. Many sustainable companies are also ESG companies, but not all ESG companies are sustainable.
So how can you tell the difference? To start, let’s look at what each term means:
Sustainable companies consider the environmental and social impact of their business practices. This includes emissions, water usage, waste management, human rights violations, etc.
ESG companies also consider their business practices’ environmental and social impact, but they go a step further by including governance policies in the mix. This means anti-corruption policies, employee safety policies, fair pay practices, etc. Understanding these differences will help you better assess whether or not to invest your money with an ESG or a sustainable company.
Are all ESG Companies Sustainable?
Sustainability is a broad term that encompasses environmental, social, and governance factors. And while all ESG companies consider these factors to some extent, not all of them are sustainable. So how can you tell the difference?
Here are three key things to look for:
- A commitment to continual improvement. Sustainable companies are always looking for ways to reduce their environmental impact and improve their social and governance practices. They set goals and track their progress over time.
- A long-term view. Sustainable companies take a long-term view of success, which means they consider the impacts of their actions not just on shareholders but also on employees, communities, and the environment.
- A focus on stakeholder engagement. ESG companies work with stakeholders to identify and address issues to achieve their business objectives.
Together, these characteristics can help you spot sustainable ESG companies in your search.
What Makes Sustainable Investing Different from Socially Responsible Investing?
The key difference between ESG and sustainability models is that sustainable investing entails creating long-term value for shareholders, employees, suppliers, customers, communities, and the environment. Socially responsible investing typically focuses on one or two of these stakeholders. What’s more, sustainable companies often have lower volatility than other companies. It also doesn’t hurt that they have a higher rate of return than non-sustainable ones. So it seems like an obvious choice to make, right? Wrong! When you invest in sustainable companies (or any company), you need to know how much risk you’re willing to take. It’s important not to confuse risks with uncertainty. Therefore, you should look at three factors: your ability to tolerate losses, your understanding of what you’re buying, and your time horizon for the investment. Once you’ve identified those three things, you can consider what kind of portfolio suits your needs.
All businesses globally give ESG and sustainability predominance. So it is up to you to determine which companies are doing more than what’s required by law. And if you’re unsure how much of a difference you can make, just invest in a sustainable company!