ESG Investing - A Promise to Sustainability or Just Another Label?

ESG encompasses Environmental, Social and Corporate Governance, and it pretty much equals to the sustainable development idea. In a world where people are more aware of environment friendliness and corporate social responsibilities, ESG is now trending: About 88% public companies, and two thirds of private ones have placed some kind of ESG initiatives in operation. Financial industry is no exception. Banking, insurance, securities, trust, forex and crypto, you have to be socially responsible as long as you are actively engaged in the system, for it is a critical part to drive global sustainability. ESG Investing, is how the idea manifests itself in the financial world.

ESG Investing: It Helps You Prosper, And Threatens You with Risks Too

The increasing number of financial services institutions such as FX/CFDs brokers and banks dabbling into the ESG game is hardly an oblivious fact over the years. Since 2022, based on Fazzaco's incomplete statistics, firms like Credit Suisse, DBS, BNY Mellon, Morgan Stanley, IG Group, Vanguard, and Swissquote, all have either launched their own ESG funds, solutions or announced partnership with others to carry out ESG programs; or established a dedicated ESG team etc. In September 2022, the online broker eToro declared that it introduced ESG scores for over 2,700 stocks on its platform, enabling users to consider environmental, social, and governance factors when building their portfolios. The addition followed and was based on the partnering with ESG Book, a data provider. CMC Invest, too, started to display ESG data for stocks, exchange-traded funds (ETFs) and investment trusts in its mobile investing app.

They are not alone, as several fintechs were stepping into the game as well, who whipped out kaleidoscopic solutions. Among them there are Temenos, GoldenSource, and Apex Group, to name a few. By the end of 2022, the sheer scale of global ESG investing has reached a staggering $2.5 trillion, of which 83% came from the European region, where people are the most environmentally conscious, and the amount of ESG investing flowing into the European financial market in the fourth quarter of 2022 alone was $40 billion.

However, while ESG promotes financial prosperity and benefits brokers, it also has its dark side, risks. In 2022, Fazzaco saw many brokers receiving fines from regulators. In November, for example, the US SEC fined Goldman Sachs $4 million for its ESG failures. Meanwhile, we also saw compliance tech companies working with brokers to alleviate the risks, including Broadridge and Fenergo.

Why is ESG Investing Trending? What is the Chain of Its Risks?

When we say ESG investing, we are talking about investing in those companies or products which have excellent scores in terms of the three sustainability aspects. The popularity of ESG investing is mainly due to the impact of recent discussions on climate change, the COVID pandemic and awareness of investor's social justice.

Specifically, of course, our planet has undergone alarmingly environmental changes, that means melting glaciers brought by climate change as well as carbon footprint from human activity. Similarly, changes occurred socially and demographically, not to mention the pandemic, which took a toll on so many lines of business. Many times, the pressure comes down on companies, which then pushes regulators to step up ESG requirements. Hence the growing importance of it.

Secondly, from the perspective of individual investors, the rise of millennial investors is inevitable, and they are the people behind the rapid ESG investing popularity. As early as in 2018, Bank of America asserted that even a "conservative estimate" suggested that ESG funds in the US alone would reach an incredible size as large as $20 trillion in the next twenty years.

At last, advances in fintech are also fueling it up. Artificial intelligence (AI), machine learning, data extraction etc., allowing individuals no longer heavily dependent on the voluntary data disclosure of companies while the timeliness and accuracy of data collection, analysis and verification are improved, so investors can better rely on themselves to evaluate the ESG scores of enterprises.

So, as mentioned above, as our world is undergoing upheaval, and investors are having better awareness of corporate social responsibility to maintain sustainability, which in turn has driven the requirements of regulatory bodies that regulate them inasmuch the authorities, too, expect them to reduce any risks that threaten the sustainability of human society by achieving excellent ESG performance.

It is enough to see that for financial institutions, ESG is no longer a moral and responsible issue, it is now more of an investment model that expands revenue, and also a type of risk that will bring potential economic losses and even threatens the survival of a company.

Final Thoughts

The relationship between the financial world and ESG is increasingly intertwined and close. It is foreseeable that more brokers will incorporate ESG into operations, rather than just using it as a label stuck on their investment offerings. Also, with the help of more B2B solution companies and fintechs, ESG will be better controlled for brokers, and relevant info disclosure will be easier for investors to access.

It is our belief that one day, every investor, broker, and even the entire society will take the principles of ESG as one of their top considerations, so that the true purpose of ESG can be achieved: that is, everyone working together to build a better world and explore more opportunities in the process.