ESG: The Keystone of Sustainable and Ethical Business Practices in the 21st Century

By: Evan Yang

From: UCLA

What is ESG?

Discussing ESG is essentially exploring how corporations can fulfill their roles as responsible global citizens. Consider ESG as a benchmark for identifying companies that pursue more than mere financial gain, emphasizing their commitment to environmental stewardship, ethical treatment of individuals, and principled business operations. The 'E' in ESG stands for Environmental, focusing on a company's ecological impact and its role as either a protector or a threat to our planet. The 'S' represents Social, examining a corporation's interactions with its employees and the wider communities it affects. Lastly, 'G' for Governance, scrutinizes the fairness and ethical standards within a company, ensuring leadership accountability. This approach appeals to those desiring to invest in businesses that contribute positively to the world, aligning financial investments with personal values.

How Can ESG appeal to the Common Business?

ESG has become ever so important in the world of business, finance, and other related fields. ESG stands as a crucial pillar all while making the world a better place while many businesses are now held accountable for aligning their business model to that of ESG principles. People want to ensure the world is in good hands and want a place where new ideas and adaptability can take the forefront of finance/business. Businesses that incorporate ESG principles better handle risks and address them head-on. A publicly ESG-based company is also able to attract new customers out of their respective markets, creating a greater brand/customer image. Additionally, ESG is most importantly needed for long-term goals, creating a brighter and better future for sustainability. ESG is everywhere, from the cars we drive (Tesla, Lucid, Rivian), to the sustainable foods we consume (vegetables, plant-based meats), and the energy we use in our homes (solar panels). ESG will continue to make a mark on society, revolutionizing the way we think about climate change and changing the future for good.

Why Should We Care About ESG Now?

Climate change is a problem, and we can see the effects of it all around us. Cities across the globe have rising sea levels, making coastal towns inhabitable. Humans have accelerated the warmth of planet Earth tenfold, adding 2 degrees Fahrenheit since the mid-20th century; this number is expected to grow by another 1.5 degrees Fahrenheit within the next 20 to 40 years (NASA). Additionally, the greenhouse effect is not inherently bad. We want Earth to be suited for our living standards, however, humans have accelerated this greenhouse effect by artificially adding greenhouse gases (GHG) to the atmosphere. Human activities (the use of fossil fuels, driving combustion cars, overconsuming meat, etc.) have caused an exponential increase in Carbon Dioxide by 149%, Methane by 262%, and Nitrous Oxide by 124%, which are levels we have not seen in the past 800,000 years (University of Michigan).

Why is ESG Critical?

Firstly, there's a growing momentum behind green innovation, with companies across the globe investing heavily in sustainable technologies. This trend underscores a collective drive towards environmental conservation, spotlighting firms that are pioneers in reducing carbon footprints, enhancing renewable energy sources, and championing eco-friendly practices. It's a movement that attracts investors eager to support businesses leading the charge against climate change.

Secondly, social responsibility is taking center stage, reflecting a deeper societal shift towards inclusivity, equity, and community engagement. Companies are increasingly measured by their impact on society, from advancing human rights to fostering employee well-being and supporting local communities. Investors are drawn to businesses that not only excel in their operations but also enrich the social fabric, embodying the ethos of giving back and building stronger, more resilient societies.

Lastly, governance has never been more critical, with a spotlight on ethical leadership, transparent operations, and corporate accountability. In a world where trust is a currency, firms that demonstrate integrity, uphold rigorous ethical standards and engage in fair practices stand out. This trend resonates with investors who seek to align their portfolios with companies that not only perform well financially but are also bastions of ethical governance.

How We Can Make a Difference in ESG Finance

Green bonds: These bonds are dedicated to the use of financing “projects or activities with positive environmental impacts” that can be further invested within renewable energy, self-sufficient buildings, and other sorts of infrastructure (PIMCO). Such investments offer tax exemptions or tax credits that simply can be used to reduce the amount of taxes we pay. By doing so, investors like us are not only able to get a solid return on investment but also bring aid to the problem of climate change.

Green ETFs: An investment that solely focuses on companies and different businesses within the ESG sector that create a positive impact not only for the environment but also for the returns of an investor. Green ETFs include sectors within solar power, wind energy, biomass energy, and low carbon/fossil fuel-free ETFs. As governments around the world recognize the urgency for climate change and sustainability, investing in green is not only increasing diversification (a key to creating generational wealth) but will create a tangible change in our environment. There are many great options when it comes to Green ETFs. Some include but are not limited to, VanEck Vectors Low Carbon Energy ETF, SPDR S&P 500 ESG ETF, Invesco Solar ETF, and the list goes on. There are many ways individuals can diversify their portfolio, all while helping the environment.

Employment: Many of us want to enter the world of finance, as it provides great opportunities, a steep learning curve, and an endless world of opportunities. With that in mind, we can make the necessary decisions to work for companies that promote these ideas while still making a living and providing for your family. Thousands of companies across the globe focus on ESG, such as Microsoft, U.S. Bank, PepsiCo, Apple, PayPal Holdings and more. There is a plethora of opportunities for those interested in finance to work for a company that fights climate change.

Conclusion

ESG is here to stay. For good reasons, ESG will transform the way billions of people around the world will live. By complying with ESG principles, both corporations and households can take one step closer to a more sustainable world, providing a brighter future for generations to come. ESG is important, necessary, and critical in times like these.

Works Cited

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NASA (2023). The effects of climate change. [online] Global Climate Change: Vital Signs of the Planet. Available at: https://climate.nasa.gov/effects/.

Center for Sustainable Systems. (n.d.). Greenhouse Gases Factsheet. [online] Available at: https://css.umich.edu/publications/factsheets/climate-change/greenhouse-gases-factsheet.

CFA, B.B. (n.d.). ESG Investing Statistics 2023. [online] Bankrate. Available at: https://www.bankrate.com/investing/esg-investing-statistics/#global.

Pacific Investment Management Company LLC. (n.d.). Understanding Green, Social and Sustainability Bonds | PIMCO. [online] Available at: https://www.pimco.com/en-us/resources/education/understanding-green-social-and-sustainability-bonds.

Corporate Finance Institute. (n.d.). Green Bond. [online] Available at: https://corporatefinanceinstitute.com/resources/esg/green-bond/#:~:text=Advantages%20of%20Green%20Bonds&text=With%20that%20said%2C%20green%20bonds [Accessed 24 Feb. 2024].

www.carboncollective.co. (n.d.). Green ETFs | Investing, Types, Risks & Future Outlook. [online] Available at: https://www.carboncollective.co/sustainable-investing/green-etf#:~:text=ETFsCon clusionFAQs- [Accessed 24 Feb. 2024].