How ESG Investing Is Reshaping The Business World

Benzinga recently had the chance to speak with Gregg Sgambati, Managing Director of S-Network Global Indexes, about the rise of environmental, social and governance (ESG) investing and the impact that it is having on the corporate world.

Sgambati discussed the pressures that fossil fuel stocks face from ESG-related fund divestitures, the ESG metrics investors should monitor for signs of possible corporate malfeasance and the latest trends in ESG investing.

Sgambati says that this year is a particularly important year for ESG causes.

“During this election year, fossil fuel companies will find themselves in the crosshairs of activist investors representing pension funds and retirement funds,” he explains.

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Many coal stocks have been hit hard by fund divestitures in recent years, and that trend could spread to other fossil fuel stocks in years to come.

While corporate malfeasance is impossible to predict, Sgambati says that investors should monitor certain ESG metrics as possible warning signs. He saw several red flags for Volkswagen AG (ADR) VLKAY prior to its devastating emissions scandal.

“In ESG terms, Governance provides the best insight into corporate management,” Sgambati told Benzinga. “While Governance ratings cannot predict that a company’s executive will perpetrate a crime, in Volkswagen’s case, they did indicate years of shallow transparency coupled with low-percentage of free-float shares.”

When Benzinga asked about the future, Sgambati said that ESG investing will continue to help usher in unprecedented levels of corporate transparency and responsibility.

“With the expansion of corporate social responsibility reports, corporate sustainability self-disclosure frameworks and ESG data, knowledgeable investors are able to highlight companies that are well-managed, have lower risk profiles and are embracing sustainability as an innovation to surpass their competition,” he concluded.

So far in 2016, the iShares MSCI USA ESG Select Scl Indx Fnd KLD is up 3.6 percent.

Disclosure: the author holds no position in the stocks mentioned.