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ESG Investing: Focusing on Significant Business Sector Shifts


Senior Market Analyst at Interactive Brokers

Environmental, social, and governance (ESG)-related issues have impacted different business sectors in more or less dramatic ways, and as governments, companies, and their stakeholders increase their engagement with these concerns, traditional industries seem to be staging significant transformations.

But which industry sectors have faced, and continue to experience, material changes? And how have ESG-related concerns influenced the economies in which certain companies operate, as well as their financial performance?

These are critical questions when performing fundamental assessments and require an analysis of massive amounts of variables to factor into investment decision-making.

Industries undergoing material shifts in their business practices, amid heightened concerns about ESG-related issues, include forest products, energy, transportation, dairy, healthcare, and several others.

Business Sector Analysis by “E”, “S” and “G”

Each of the three main umbrella themes that comprise ESG – environmental, social and governance – may have varying degrees of importance when considering a company’s operations, polices, standard business practices, and capital deployment – as well as, ultimately, its financial performance.

Under ESG, a company whose revenues rely on cutting down trees to produce wood-based products, or one that produces fossil fuels, for example, will likely face more environmental scrutiny, while healthcare, food manufacturers, and entertainment companies will likely be assessed for their impacts on society. Meanwhile, while corporate-governance policies may be more pervasive across business sectors, they may be better addressed by some more than others.

Forestry and Wood Products

Taking a broad look at the forestry and wood products sector –

When you think about the kinds of products that come from trees, you may think about firms such as The International Paper Company, or corrugated packaging company WestRock.

Besides pulp and paper, wood-based building materials for wood flooring, mobile homes, and wood buildings are all derived from the world’s forests.

Protecting forests appears to be key to not only safeguarding biodiversity, but also helping to combat climate change, as well as to secure sustainable water and food supply. The UN’s Food and Agriculture Organization recently estimated that more than 100 million people in the European Union regularly consume forest foods as a nutritional resource, while around 2.4 billion people – in both urban and rural settings – use wood-based energy for cooking.

Against this landscape, the global project, which aims to grow, restore and conserve one trillion trees also argues that nature-based solutions, including locking-up carbon in the world’s forests, grasslands, and wetlands can provide up to one-third of the emissions reductions required by the Paris Agreement’s 2030 target, adding that the remaining reductions would need to come from the energy, heavy industry, and finance sectors.

For their part, companies such as International Paper and WestRock have aligned their strategies to address forest management-related concerns.

International Paper, for example, has among its goals to reduce greenhouse gas emissions, improve water quality, and integrate water management into its regular facility assessments, as well as increase its recycling efforts, and its volume of certified fiber.

WestRock also appears to be committed to sustainable forestry, including cutting CO2 emissions, and protecting local and regional water supplies, while making improvements in sustainable packaging, and ensuring its governance policies cover its workforce.

While businesses focus on aligning their strategies to reduce ESG-related risks, you may also consider how the economic landscape may change amid the disruption, including how employment, manufacturing, or trade may be affected.

Want to Know More?

Learn more about how ESG-related issues have been impacting other financial market sectors, including energy, transportation, dairy, healthcare, and more, in our Traders’ Academy lesson ESG Investing: Market Impacts.

There is also a growing number of financial products associated with ESG, including certain exchange-traded funds (ETFs) and debt instruments, which, along with other topics, are addressed in our full Traders’ Academy course on ESG Investing.

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