Today is Earth Day, a 52-year-old annual celebration where citizens around the world reflect on and rally for environmental issues. It is also a day where big corporations are often pressed towards more sustainable and green solutions. Taking the lead in this movement are investors that follow a set of Environmental, Social, and Governance standards in their investment decisions: the ESG criteria.
The emphasis on ESG criteria has grown over time as it was fueled by mutual funds and brokerage companies that offer exchange-traded funds (ETFs) and other types of financial products based on the criteria. As pointed out in Bloomberg research, “ESG assets may hit $53 trillion by 2025.” Responsible investing has grown to become very popular, and it is a source of cash for corporations that are able to legitimately show their support for social and environmental issues. However, it can also be a source of loss to corporations once investors decide to exclude stocks that fail to conform to the criteria.
A recent example was when Carl Incahn, an investor that owns roughly $50,000 worth of McDonald’s (NYSE: MCD) stock, demanded that the company change its pig sourcing from the suppliers that house animals in crates to a “crate-free” system. The investor is continuing to push the board to make more environmentally conscious decisions around its food sourcing because, according to Incahn, “McDonald’s inability to fulfill its 10-year-old promise indicates cracks in the board’s highly touted ESG efforts.”
Mastercard Inc. (MA.N) is following a different approach to ESG. This week, the company announced that employee bonuses will be linked to ESG criteria. By tying the compensation to emissions, the company is expecting to cut carbon usage, “improve financial inclusion and gender pay parity” as stated by Chief Executive Michael Miebach.
Overall, the growing number of ESG-based investment opportunities is an important step in terms of societal advancement in a period where socially and environmentally conscious investors have increased exponentially. However, it also means that corporations will have to work extra hard to follow the standards while building investor trust.