A recent study reported that the market value of U.S. companies qualifying as Environmental, Social and Governance (ESG) companies made up 26% of the $46 trillion managed by professional investors. I had long been a skeptic of ESG investing due to its initial exclusion of industries such as defense and alcohol. However, ESG has evolved and now includes all legal industries, looking for best practices within industries. The results have been powerful:
1) ESG companies have outperformed non-ESG companies by 3% per year over the past five years, and
2) 90% of bankruptcies (15 of 17) from 2005-2015 in the S&P500 could have been avoided by not purchasing companies with low ESG scores.
In reviewing financial statements, I have lightly scanned the "ESG" portion of their reports. However, I am beginning to form respect for these ESG components. For me, they represent the likelihood that those companies have their act together. If a company can not only compete in today's global economy, but can also find ways to improve their impact in the world, it may be highlighting the degree to which such companies are either competing favorably or being managed effectively enough to move down the "to-do" list.
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