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What is Sustainable Investment? Part 1


The content of the article

Learn to correctly assess the value of a company not only from a fundamental point of view, but also from the “market side” on the course “School of Investments” from SF Education!

In this article, we will talk about one of the most discussed in investment circles and the circles of their “regulatory” bodies, the topic of finance.

It’s about ESG investing. This is a fairly new “product” that fits well with the direction of world politics – Environmental, Social, and Corporate Governance (ESG) – environmental, social and corporate.

Value

Does this mean that you can and should only invest in companies that produce windmills or organic products? Or can only financial instruments be ESG-qualified? Or does the CEO have to meet all the criteria? Together.

ESG category implies that any company has a certain policy / standards / criteria that summarize the environmental, social and management aspects of doing business.

ESG can also mean a financial instrument with a certain set of criteria, for example, bonds of companies that can be classified as ESG.

These principles ensure sustainable development and are “favorable” in terms of forecast and rating, and therefore, an excellent safe “target” for investment. Such companies are of interest to socially conscious investors looking for financial investment opportunities in order to solve social problems and generate profits. In our open course “Immerse yourself in the world of trading and personal investment” we talk about how to successfully trade in the stock market.

Factors

As stated above, ESG stands for Environmental, Social, and Corporate Governance and is a set of criteria. Let’s take a closer look at their meanings:

Environmental / Environmental criteria – how carefully the company treats nature.

Social / Social criteria – how carefully the company manages its employees, suppliers, customers and society.

Corporate Governance / Corporate criteria – how carefully the company organized the work of the management, the remuneration of the managers, how carefully the audit, internal control is carried out and the rights of shareholders are respected.

These are a kind of factors that have a certain weight category, on the basis of which a particular company (or financial product) belongs or does not belong to the ESG category. A set of these factors is added to the rating in the financial world.

Rating

The ESG rating summarizes the presence of the above factors and shows how stable the issuer (company) or financial product (bond, stock, etc.) is, or to what extent the ESG criteria are implemented in the company, and also gives the investor a quick answer to the question: “ does a potential investment meet its own requirements for sustainable investment management? “

Unlike the classical financial rating, which is based on economic criteria of profitability, liquidity and risk, the ESG rating is based on the “strength” of a company to withstand environmental, social and corporate risks.

While S&P, Moody’s and Fitch are the “classic” examples of rating vendors in the financial world, ISS, MSCI ESG, Swedish shareholder services provider GES International, etc. are examples of ESG rating vendors. There is also a buy-up / takeover by “classic vendors” of individual companies involved in ESG ratings. This is a kind of maintenance of the establishment in the market.

To date, there are no unified principles for deriving an ESG rating yet.

The MSCI ESG rating does not look like a “classic” alphabetic, for example, triple-A (AAA), but has a numeric format from 0 to 10, which is tied to the alphabetic:

Letter rating Numerical rating
AAA 8.571-10.000
AA 7.143-8.570
A 5.714-7.142
BBB 4.286-5.713
BB 2.857-4.285
B 1.429-2.856
CCC 0.000-1.428

The rating as a whole is compiled either on the available public information about the company, which is done by most vendors, or a separate request is made for a deeper analysis. Unfortunately, so far there are no uniform clear rules for companies regarding the publication and disclosure of ESG policies and information in general.

Thus, we have understood the basic concepts and attributes of ESG financing, which will allow us to more easily understand the trends and details of this market, which will be disclosed in the next article.

Learn to correctly assess the value of a company not only from a fundamental point of view, but also from the “market side” on the course “School of Investments” from SF Education!

Moris Akline
About author

Speculative operations in the foreign exchange and stock market. Work with futures and indices on CME. Work on FORTS and RTS. Development of portfolios and investment strategies for clients. Knowledge of technical (price charts of various types, indicators and oscillators, trends, channels, support / resistance levels) and fundamental analysis, take note of news. I work according to my trading strategy in compliance with the rules of capital management and risk management. Development of trust management strategies. Technique of order execution, placing and changing protective stop-losses, hedging.
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