The ESG investing revolution: What you need to know to profit

Image of a woman holding a model of earth on a green backdrop.

In recent years, environmental, social, and governance (ESG) investing has surged from a niche interest to a central strategy in the portfolios of astute investors worldwide.

On the ASX, ESG investing is reshaping priorities, spotlighting companies that not only aim for financial success but also demonstrate a strong commitment to sustainability and ethical practices.

ESG investing trends on the ASX

Growing awareness of the impacts of climate change, social responsibility, and corporate governance has fueled an uptick in ASX investing on the ASX. Investors are increasingly applying non-financial factors to their investment analysis process to identify material risks and growth opportunities.

There are now more than $783 billion responsible investment assets under management in Australia. In 2024, this trend is set to continue, with ESG funds attracting substantial inflows as more individuals seek to align their investments with their values.

Indeed, in the final quarter of 2023 alone, sustainable funds in Australia and New Zealand attracted more than USD$567 million in inflows.

What are the benefits?

Investing in companies that prioritise ESG criteria isn’t just about making ethically sound choices; it’s a strategy that offers tangible benefits for investors.

Firstly, ESG investing places a spotlight on long-term sustainability — companies focused on this principle tend to prepare for future challenges and opportunities. This can result in greater resilience and adaptability amid market volatility, potentially leading to more stable returns.

ESG investing taps into a growing trend where consumers and investors alike demand greater corporate responsibility. Companies that align with these values are likely to attract a more loyal customer base and a more committed pool of investors, which can drive sales and, by extension, share price growth.

This alignment with broader societal shifts can not only enhance a company’s brand reputation but also secure a competitive edge in the marketplace.

Another significant benefit of ESG investing is risk mitigation. Companies that actively manage their environmental impact, maintain robust governance practices, and foster positive social relationships are often less susceptible to scandals, legal troubles, and operational disruptions.

This risk reduction is crucial for investors seeking to protect portfolios from unexpected downturns caused by non-financial factors.

Future focus

ESG investing opens doors to innovative and emerging sectors. By focusing on companies that lead in sustainability, investors gain exposure to industries at the forefront of addressing global challenges, such as renewable energy, clean technology, and sustainable agriculture.

These sectors not only promise growth as the world shifts towards more sustainable practices but also offer the opportunity to contribute positively to pressing global issues.

ESG investing embodies the principle that financial success and positive global impact are not mutually exclusive.

By incorporating ESG criteria into investment decisions, investors can achieve a portfolio that supports sustainable growth, aligns with their values, and contributes to a more resilient global economy.

ESG standouts on the ASX

While many ASX-listed companies are making strides in ESG, a few stand out for their exceptional commitment to sustainability and ethical practices.

Names such as CSL Ltd (ASX: CSL), Cochlear Ltd (ASX: COH), Xero Ltd (ASX: XRO), and Bank of Queensland Ltd (ASX: BOQ) are frequently cited for their robust ESG frameworks.

This makes them attractive to investors looking to make a positive impact without sacrificing returns.

Foolish takeaway

ESG investing on the ASX is more than a trend — it’s a fundamental shift in how we approach investing for the future. By focusing on companies that excel in environmental, social, and governance criteria, investors not only stand to benefit financially but also contribute to a more sustainable world.

As the ESG landscape evolves, staying informed and choosing wisely will be key to achieving both financial and ethical returns.

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Motley Fool contributor Katherine O’Brien has positions in CSL and Cochlear. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Cochlear, and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended CSL and Cochlear. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.