Every investor who has good knowledge about the stock market history, not just read about it but have actually experienced the environment, knows this one fact, markets go down when there is a clear and growing problem on domestic and global spending. This has happened often enough that investor understand that there are market cycles.
In any nation, spending will be hindered by three common issues
1. Due to natural change – small nations that constantly experience extreme natural disasters can barely have an economy to sustain a increased spending to grow its GDP. Such extreme weather doesn’t impact nations on mainland in the same intensity as small nations surrounded by ocean. If there was ever a extreme and prolonged natural disaster, “drought”, it can definitely impact on local town. However, global warming is growing this local natural disasters on a global scale. As nations start to struggle with this, they will be willing to invest in companies that sell products that help grow crops in those conditions. This could provide a spark in economic growth.
ESG and Impact investing would locate companies that help finding more solutions even if they are not making profit. This could start a whole new market that is ready to grow. Hence, ESG investors are entering a market that is poised to grow.
2. Geopolitics – we can’t escape it, politics and politicians are here to stay. We haven’t found a system that doesn’t use a group to run many, i.e managers, executives, generals, government. Because of this, there will be certain power for the few. This obviously attracts people with agenda. Either with one party or two party system or many, government policies will always change. These changes give cycles. However, what if there is a greatly corrupt government. Investor would flee to a more stable market under another government, hence, smaller GDP and smaller investment return.
ESG and impact investing would invest in companies that doesn’t do business with tyrannical government, either domestic or international. It is only matter of how powerful the government is if the domestic company refuses to do business with it. By supporting companies that promote sustainable government system where economy can grow, investors are positioning themselves as value investors in the long run.
3. Last but not the least, healthy system where businesses can operate without much government intervention and without threat of monopolistic power. Monopoly is an enemy toward creativeness. Not many companies are willing to lose their market power by taking on risky business idea. However, some of those risky business ideas can become more valuable than the company itself.
ESG investing puts the power back in shareholders hand as they have a say in if certain company is competing in ways that doesn’t support healthy competition. This is a good step in removing government involvement in the economy.
ESG and impact investing is the next leap from Adam Smith’s theory of capitalism, an invisible hand that brings a common reason among many individuals as necessity arises. ESG and impact investing forces us to think beyond 10 – 20 years investment horizon. And increases the chance of a comfortable environment to enjoy our retirement, knowing that we did something for our next generation.
