Professionals in the securities market are under pressure to upscale their skills to offer superior investment advice in the rapidly changing global business environment.
It is settled in securities analysis and portfolio management that every investment is a trade-off of risk and return. An investor’s ultimate goal is to maximise return and minimise risk. The higher the risk, the higher the return and vice versa. This explains why speculators have a high-risk appetite. Their portfolio is top-heavy with assets such as equities, commodities, high-yield bonds, commodities and even real estate. These assets have a significant degree of price volatility. Conversely, investors with low-risk appetite would rather populate their portfolio with assets classes such as series savings bonds, short-term certificate deposit, treasury bills, corporate bonds, dividend-paying stocks, preferred stocks and money market funds among others.
In my piece titled, “Investors should watch out for red flags,” I identified some key issues that an average investor should consider before buying into shares of a company. It is fundamental to have an insight into the quality of management of such a company. The investor should analyse the trends of the company’s earnings to identify instances of shrinking profit margins and decelerating sales growth among others. An investor does not need to be an expert in technical and fundamental analysis to make an informed investment decision. This is why he needs a stockbroker or broadly, securities trader. It is a costly gamble for anyone who has no knowledge of operations of a stock market to embark on portfolio construction. Share prices of companies that fail the minimum test of investment are vulnerable to volatility. Many investors have lost their life savings to investment by impulse. These are investors who have no investment objective. They do not know their risk tolerance, not to mention time horizon.
Given the dynamics of changes in the global economy, there is a new trend of risk aversion strategy that enables an investor to beam its lens on the risk profile of a company ahead of investment decisions. In 2005, the United Nations and Swiss Federal Department of Foreign Affairs published a report titled, “Who Cares Wins.” The 59-page report contains recommendations by the financial industry on the need to integrate environmental, social and governance issues in “analysis, asset management and securities brokerage.”
By deploying ESG to investment analysis of a company, it helps an investor to have a helicopter view of the company’s future to minimise risk. This is a major component of sustainability which in a simple language means meeting one’s present needs without compromising the future. Since the 2005 Report of the United Nations, ESG has begun to gain traction as a framework used by savvy investors to evaluate an organisation’s performance against specific criteria. Application of ESG is not done by only investors in a company, customers and employees. This is an ideological shift whereby the success of a company transcends profitability. It is also measured by how the organisation supports and sustains the environment where the business operates.
According to the Deloitte Center for Financial Services, in 2025, it is estimated that 50 per cent of all professionally managed investments in the United States will be ESG-mandated assets. There is a divergent opinion whether ESG and sustainability are the same. This is because both highlight the importance of the environment, social and governance setting of a business.
A content writer, Jane Courtnell in June 2022, wrote a piece, titled, “ESG reporting: How does it differ from sustainability reporting?.” According to her, ESG and sustainability have similarities and differences when she posited that, “The term ESG seems to act as a synonym for sustainability, yet the interchangeable use of these two terms is incorrect. ESG and sustainability are both strategic considerations for businesses, executive teams, and investors. They both share the same goal of improving a company’s business practices to boost profits and win favour from investors, customers, and regulators – while safeguarding the environment and supporting communities. The main difference between ESG and sustainability is the stakeholders each addresses. ESG is a concept used by investors, giving them a framework to assess a company’s performance and risk.’’
From Courtell’s submission, it is obvious that the reporting style of ESG and sustainability are not the same. It is pertinent to note that an ESG report aims at exposing a company’s risk profile to investors. It is mandatory for a company to provide a copy of its governance and code of ethics in the annual report. New regulations are underway to simplify environmental data because it is tricky. But the data is desirable for ESG.
Every quoted company has an obligation to improve on its ESG. It has become a major benchmark for investors in analysing a company’s risk profile.