In recent years, ESG investing has been trending. ESG investing allows you to support companies aiming to impact the world positively. It aligns your investment choices with your values by focusing on environmental, social, and governance factors. ESG investors seek companies that commit to improving their performance in these areas.
What is ESG?
ESG stands for environment, social, and governance. ESG investing is a way to invest in companies that strive to improve the world and align with personal values. It focuses on three areas: environment, social, and governance. Sustainable investing is a broader term encompassing various strategies aiming for financial returns while benefiting society. These strategies can range from excluding “bad actor” companies to investing in companies that support specific environmental goals. The asset management industry is encouraged to be more intentional with branding to improve public understanding and help investors.
Working of ESG investing:
- Environment: This looks at a company’s environmental impact, including its carbon footprint, efforts to mitigate toxic chemicals, and commitment to sustainability in the supply chain.
- Social: It assesses how a company improves its social impact internally and in the broader community. This includes factors such as LGBTQ+ equality, racial diversity in leadership and staff, inclusion programs, hiring practices, and the company’s advocacy for social good beyond its business scope.
- Governance: This focuses on how the company’s board and management drive positive change. It considers issues like executive pay, diversity in leadership, and how effective leadership interacts with shareholders.
Importance of ESG investing:
ESG investing is crucial because it emphasizes a company’s responsibility towards its stakeholders, encompassing workers, communities, customers, shareholders, and the environment. By considering the impact on these stakeholders, ESG investing becomes a practical approach for assessing the quality of investments.
According to Mike Walters, CEO of USA Financial, this approach benefits the stakeholders and helps identify reliable and sustainable companies. When companies strive to balance the benefits for each stakeholder, they become well-run companies, making them good stocks to own.
How to find ESG investments:
ESG investment can be found with the help of following ways like
- Do research on your own: If you are an investor looking for individual stocks, you can start by referring to “best of” lists published by various outlets that highlight the top ESG-rated stocks each year. These lists can help you identify potential investments that align with your goals. Once you have recognized these stocks, you can build a diversified portfolio by considering an asset allocation strategy that suits your investment horizon.
- Robo-advisors: Robo-advisors offer a unique combination of do-it-yourself (DIY) investing and expert guidance, explicitly focusing on environmental, social, and governance (ESG) considerations. Notable ESG-conscious options in this space include Betterment, Ellevest, Wealthsimple, Sustainfolio, Earthfolio, and OpenInvest. Although robo-advisors may have slightly higher fees than traditional DIY investing, they provide valuable research and automated portfolio management. It’s worth noting that these platforms may suggest exchange-traded funds (ETFs) that you could select on your own, but their recommendations can still be beneficial.
- Financial advisors: Financial advisors offer valuable help with ESG investing and provide a comprehensive overview of your finances. They consider personal values to customize ESG strategies. If you already have an advisor, they can guide you towards high ESG-rated investments aligned with your goals. When choosing an advisor, enquire about their past ESG recommendations. While more expensive, working with an advisor gives you a trusted partner for impactful investments.
Which are the ESG funds?
- SRI fund: Socially responsible investing (SRI) is a strategy that helps investors to align their investment choices with their values. It involves investing in companies that agree with an investor’s social and environmental values.
ESG investing considers how a company’s practices and policies impact profitability and future returns, but SRI is more focused on whether an investment is aligned with an investor’s values. While ESG focuses on corporate performance, SRI focuses on the investor’s outlook.
If someone is careful about health and well-being, an SRI strategy may not invest in companies that produce alcohol or tobacco products.
- ESG funds: ESG funds focus on investing in companies that score well on environmental, social, and governance criteria. These companies prioritize reducing their ecological impact, treating employees and customers well, promoting corporate diversity, and aligning their policies with shareholder interests. Climate change, racial justice, diversity, equity, and inclusion are critical financial metrics because a company’s workforce plays a significant role in its success.
- Impact funds: ESG funds primarily focus on assessing risks to a company’s valuation rather than their contributions to the community. They prioritize factors like environmental impact, social practices, and governance. On the other hand, impact funds aim to make tangible progress toward sustainable goals. Morningstar categorizes impact funds into five buckets: climate action, healthy ecosystem, resource scarcity, basic needs, and human development. While ESG funds may reward companies with low carbon footprints, climate impact funds specifically invest in companies manufacturing solar panels or wind turbines, providing immediate solutions for climate transition.
In conclusion, ESG investing allows individuals to align their investments with their values by focusing on environmental, social, and governance factors. It supports companies that aim to make a positive impact on the world. ESG funds, SRI strategies, and impact funds offer different approaches to incorporating ethical considerations into investments. Finding ESG investments can be done through personal research, robo-advisors, or financial advisors. Ultimately, ESG investing enables individuals to pursue profit with purpose and contribute to a better future.