3 Golden Rules Investor Should Learn Before Going Into ESG

Photo by Clark Tibbs on Unsplash

Investing in stock companies is more than just looking at balance sheets and price history. Oftentimes, it’s equally important to use money as a power to invest with a mission. That’s why we hear more and more about ethical investments such as ESG investing, socially responsible investing, and impact investing. These terms are often interchangeably used because they all care about the effects on people and planet. But they do differ slightly:

  • Socially responsible investing — a term that started in 1970s when investors stopped investing in companies that dealt with alcohol, tobacco, weapons, and gambling — activities that negatively affect the society and the environment.
  • ESG investing — considers companies with sustainable programs for improving environmental, social, and corporate governance issues, based on its acronym.
  • Impact investing — is deeply values-based and focuses on organizations or companies that give a positive impact to the society.

Analyzing the intentions of these kinds of funds should be part of an investor’s due diligence process. Investors can make use of the ABC analysis as an extensive step-by-step guide.

What is the ABC Analysis?

The ABC analysis is a framework that can guide investors in aligning their investments to their own intentions.

Too often, investors become complacent with their due diligence when their investments are labelled as “sustainable”, “ethical”, or “socially responsible”. The ABC analysis is a detailed analysis tool that will help investors understand what their investment portfolio is trying to achieve.

ABC stands for:

  • Act to avoid harm,
  • Benefit stakeholders, and
  • Contribute to solutions

Act to Avoid Harm

Investors seek companies that are ethical and responsible as much as possible. These companies are transparent to their investors when it comes to how they conduct their business with integrity. At the very least, they are compliant with the requirements set forth by state rules and regulations.

Benefit Stakeholders

The stakeholders of a company are people or organizations with interest to the company that can either affect or be affected by its businesses. Investors are stakeholders of a company. So are its employees, business partners, and the community where the company operates in.

For example, ESG investments aim to benefit the stakeholders. It runs programs that will benefit the environment (e.g. climate change mitigation actions), society (e.g. work culture), and corporate governance (e.g. reasonable executive compensation).

Contribute to Solutions

More than benefitting the stakeholders, some companies go beyond and work on solutions to the world’s gruelling problems. Companies that work hand-in-hand with the U.N’s 17 Sustainable Development Goals (SDG). To mention a few, these companies can contribute solutions to end poverty and hunger, gender equality, affordable clean energy, climate action, and peace & justice.

The key distinction here are programs that aim to benefit the underserved population of the world. At this point, the intentions of investors are aligned with the 17 SDGs. The companies are just a medium for them to contribute solutions.

The ABC analysis is a product of the Impact Management Project which is a non-profit organization of companies that aims to build global best practices on how to measure, manage, and report impact.

How to Use ABC Analysis

What is the overall impact of your investment portfolio?

In a nutshell, you can categorize the impact of your investments with the ABC analysis.

Source: Impact Management Project

The flow diagram above simplifies the classification of impacts of your investments. Impact refers to how the investor’s companies affect the people and the planet. The interpretation of impacts will vary per investor because of personal values and intentions.

To learn more and go deeper in retrospect on the impacts of your investments, the ABC analysis evaluates a company’s performance based on 5 dimensions:

Source: Impact Management Project

These are important guide questions to ask yourself when you assess your current investments or investments you’re planning to get in the future. Within these 5 dimensions, the IMP further breaks it down to 15 data categories — the ultimate outcome is for investors to set goals and assess the performance of their company investments.

Source: Impact Management Project

The assessment for each category will entail a lot of background research which is the appropriate due diligence process. Ethical investments, particularly ESG investing, are still relatively new. There is no unifying standard that can compare how companies perform compared to its peers. But with the ABC analysis, you get to decide if the investment funds reflect your intentions.

When assessments have reached their evaluation, you can now classify the impact of your investment portfolio:

Source: Impact Management Project
Source: Impact Management Project

Why Investors Should Classify The Impact of Their Investments

Like in the general pursuit towards success, it’s important to remain intentional with why you’re investing.

Sure, we invest today so we can reap rewards later on that our future selves will thank us for. But why not do the same while also taking care of the people and the planet? It may sound cliche but with the overwhelming problems that the world is facing today, preserving our planet seems to be our only saving grace.

The point of doing ABC analysis is not about targeting C-class businesses. Even investing in A-class companies that act to avoid harm is already a worthwhile investment. Like a domino effect, if more and more companies act to avoid harm, then we wouldn’t need a lot of C-class businesses. Despite that, with our current state of world today, companies that target the 17 sustainable development goals are a huge plus.

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Roman Reitman

Roman Reitman

Proficient Investor concentrated on ethical investments and green technologies.