3 reasons ESG investing might become more rewarding

·3-min read
Light bulb with growing tree.
Image source: Getty Images

The idea of investing with an eye on the environmental and social impact of businesses in which I buy shares appeals to me. In practice though, such ESG investing can be difficult.

Some businesses are very profitable but have a harmful social impact. Indeed, one reason I have shunned Meta stock is because I do not like the impact I think its social media offer is having on society.

Other businesses may be green in some ways but not others. Unilever has made big strides to improve its social and environmental impact, for example, but how environmentally-friendly can a mass consumer goods business ever really become?

For now then, ESG investing does not play a big role in my investment philosophy. That may change over time though. Here are three reasons why.

Bigger focus on ESG issues

From green energy to supply chains, many companies have been paying more and more attention to ESG issues.

I think that trend is set to continue. It could mean that, a few years from now, there will be a much wider universe of companies open to ESG investors than is the case now.

Having a bigger pool of businesses from which to choose could potentially mean a broader range of opportunities for my investment – hopefully including some very good ones.

Business model evolution

One of the challenges for ESG investing today is that a lot of environmentally-focused companies continue to have fairly unproven business models.

Consider renewable energy shares such as Ceres Power and ITM Power.

Maybe they will perform well in future, maybe not. For now I find it hard to tell, as their industry and business model are still evolving rapidly. There may be a lot more evolution still to come.

Just because an industry is promising does not mean any company in it will do well. In fact, the reverse is often true. A potentially large industry can attract a lot of entrants, making it more competitive.

A few years down the line I will feel more comfortable investing in an area like renewable energy, as the business models involved should be better refined and so easier to evaluate.

Global opportunities

While ESG investing may be popular with some investors in a few markets now, in large parts of the world it is still an afterthought at best.

But the issues it seeks to tackle are global ones, so I expect them to have broader appeal a decade from now. A number of ESG businesses listed on the London stock market now seem very parochial. That is not necessarily bad, but it can limit the long-term opportunities for growth they have.

I expect that to change, as such companies branch out more and develop a global footprint. Ceres Power’s effort to establish a beachhead in east Asia is one example of this.

As companies go global, the potential rewards to me from ESG investing could also grow in scale. That is why I am already keeping an eye on firms with a strong ESG footprint, even if I am not investing in them just yet.

The post 3 reasons ESG investing might become more rewarding appeared first on The Motley Fool UK.

More reading

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Meta Platforms and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023