ESG investing is a complex topic that can be difficult to understand, even for experienced investors. You may have heard of ESG investing, but you’re not sure what it is or why you should care. So, we are going to it down in an easy-to-understand way which explains why this type of investing is important for both individuals and businesses.
In a nutshell, ESG investing is the practice of considering environmental, social and governance factors when making investment decisions. Proponents of ESG investing argue that it’s not only the right thing to do, but that it can also lead to better financial performance (actually, that has been proven). So, should you be incorporating ESG into your portfolio? Or maybe the question should be, do you want to help build a more sustainable world and make a little profit while you’re doing it? (Take yer time, think about it). Here’s what you need to know.
- What is meant by ESG investing?
- How do you invest in an ESG portfolio?
- Is ESG investing profitable?
- What is an ESG strategy?
- FAQ
What is meant by ESG investing?
Let’s start at the beginning. Like we mentioned ESG investing is considered to be the practice of incorporating environmental, social and governance factors into investment decisions. That makes it similar to ethical investing, which focuses on investing in companies that behave ethically or are fairly managed, but is different because ESG also takes into account the company’s business sustainability.
Consider this – each time you buy a product or service you are also buying the company behind that product or service. Your purchase, whether it’s a coffee from Starbucks, your new iPhone, even office supplies for your job are all transactions you make with companies whose business practices may affect the environment, society and governance.
ESG portfolios use an investment strategy which takes into account how environmentally friendly a company is or what their employee policies are. By investing in companies that have good ESG practices, you can ensure that your money is being used to support businesses that have a positive impact on society and the environment.
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What does ESG stand for?
ESG is an acronym for Environmental, Social and Governance.
Environmental ESG focuses on a company’s environmental practices and how those practices affect or are affected by society. There are several components of ESG investing which focus on the environment including climate change, natural resources and deforestation.
Social ESG focuses on the relationship between a company’s social responsibility practices and its impact on society including diversity policies, employee relations, human rights and charitable giving.
Governance ESG includes how to improve good governance within companies which would lead to better business practices including board diversity, executive compensation, political contributions and financial transparency.
To sum it up, for decades companies focussed on one thing: Profit. Profit above the planet, profit above people and profit above taking responsibility for their actions. But this approach to business has created significant social and environmental problems that are increasingly difficult to ignore.
ESG investing is an attempt to include the concerns of people, planet and profit in your investment decision making process.
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Why should I care about ESG investing?
Now when you think about it, when you invest in something you are basically putting your money down on a bet. That bet is that the company you’ve invested in will succeed and return that value to you. You can say, “Well of course I want my investment to do well!” And it’s true, but every time we invest we’re also betting on a business model which has been around for hundreds of years and aims to meet our needs (and wants).
Before ESG and SRI, they have done this by exploiting natural resources, mis-treating employees and taking advantage of the fact that many people are willing to work for lower wages under poorer conditions.
While traditional investing has created an incredibly wealthy elite, it has also come at great cost to society and the environment. Just consider how much environmental degradation we’ve seen in the past century, how big of an impact socioeconomic inequality has on our world and the many sweatshops that bustle with workers earning paltry wages. And we are not just referring to “other” countries. It happens in the United States too.
The world is changing, new models like circular economies are becoming more popular, people are starting to understand how their purchasing decisions can affect the planet and society is beginning to hold corporations accountable for the harm they cause. So, ESG investing can be seen as a way to deal with the negative outcomes of traditional investment models.
How do you invest in an ESG portfolio?
Many ESG portfolios are made up entirely or have some overlap with SRI funds which use environmental, social, and governance criteria when making investment decisions. However, many investors are now looking for SRI and ESG funds that also include fossil fuel-free portfolios. Some of the best SRI and ESG funds to look for include:
- Calvert Social Investment Fund
- Pax World Global Balanced Fund
- Walden Sustainable Equity Fund
- Parnassus Funds.
However, you can also look for ESG funds that focus on specific criteria such as climate change or green energy. Some of these funds include:
- ArchitectureShares ArCH
- Climate Solutions ETF
- First Trust Global Wind Energy ETF
- First Trust NASDAQ Clean Edge Green Energy Index Fund
- Vanguard FTSE Social Index Fund (VFTAX)
- iShares MSCI USA ESG Select ETF (SUSA)
- Parnassus Core Equity Investor (PRBLX)
- iShares Global Clean Energy ETF (ICLN)
- Shelton Green Alpha Fund (NEXTX)
- 1919 Socially Responsive Balanced Fund (SSIAX)
- Alliance Bernstein Sustainable Global Thematic Fund (ATEYX)
ESG investing can be a little daunting at first, but more and more people are discovering that it’s not as complicated as it may seem. While you may know very little about ESG investing, we’ve laid out some of the basics to get you started!
Because many traditional investment firms are becoming more aware of this movement, they have created new products aimed at investors who want to incorporate environmental, social, and governance criteria into their investment decisions. These investments can be found in SRI funds or ESG funds.
SRI (or Socially Responsible Investing) is the practice of investing in companies that match your investment goals and also consider certain social, environmental, and governance factors when making their decisions. SRI has been around for a while and has become an important factor in how we invest our money. The
Why should I care about my investments?
Good ESG investing companies aren’t just “feel-good” stories – they also provide better returns over time. Multiple studies show that ESG investing is growing, and outperforms non-SRI counterparts and what’s more it’s often cheaper than other types of investments because many funds are family-managed or involved to lower costs.
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Is ESG investing profitable?
As people continue to demand more transparency from companies about their environmental impact, ESG investing will only grow. It’s already becoming common practice for pension funds and other institutional investors to have a portion of their investments go into SRI or ESG specifically because it helps lower risk and identify opportunities that companies may not be aware of yet.
ESG investing is a great way to use your consumer power as a means of investing. By choosing to put your money into companies that are making the world a better place, you can use your money as a force for good.
What types of ESG investing products are available?
ETFs and Funds may be the most obvious investment because they are popping up everywhere these days. But there are other ways to diversify your portfolio through socially responsible investing. One overlooked way to do so is through your retirement plan. Many companies offer socially responsible investment options. If you’re not sure whether yours does, ask your benefits administrator for details. There is also the option to invest outside of your retirement plan or even create an ESG-friendly portfolio using low-cost index funds that are widely available. You may also want to use a platform that allows Copy Trading or Social Trading, whereby you can follow top investors in sustainability and make the same moves.
What is an ESG strategy?
There are many sustainable investing strategies, each catering to a different type of investor. For some, ESG simply means avoiding companies involved in certain industries such as tobacco and weapons manufacturing, and focusing on those that make their products sustainably or donate profits to charitable causes. Some people go into more depth by investigating how companies treat employees, manage supply chains, and impact the environment, among many other factors. But the bottom line is that ESG is all about understanding how your money is used.
What are the benefits of investing with an ESG strategy?
One of the biggest benefits of ESG investing is that it has historically outperformed its non-SRI counterparts so if you’re looking to diversify your portfolio, this may be a good option for you. In addition, the companies you invest in through your ESG strategy are likely to be more aware of their environmental impact because if they’re not, that could affect how you view them as a company and even impact the value of your investment.
As ESG investing becomes more popular, many traditional investment firms have offered new products aimed at investors who want to make socially responsible choices. While you can still find ESG investing products in specialty firms, more traditional investment companies are offering options for those who may be looking to invest in this space for the first time.
FAQ
What is an ESG ETF?
An ETF is Exchange Traded Fund or product that is typically used to track or mirror the performance of an index (such as the S&P 500). It can also be used to invest in specific sectors, commodities, and types of companies. Some ESG ETFs may track an index related to green energy, sustainable transportation, or even food sustainability.
What can I expect from an ESG fund?
An ESG fund is a little different from an ETF because it invests in a specific company, rather than tracking or mirroring the performance of an index. They can be very focused — such as investing only in wind farm companies — but they may also be more broad and invest in companies across the SRI spectrum. The best advice is to find companies that align with your values and focus on something that you care about, or interests you.
What should I know before I invest?
There are lots of options available now, but make sure to do your research before you pull the trigger on any investment. Look at expense ratios (make sure they’re low); read up on what you’re investing in; and consult with a financial advisor familiar with ESG investing if you need to. Today there are many affordable mini-investment courses available. They are cheap, you can work at your own speed and they come with an advisor that will help you along. We highly recommend them for beginners and advanced investors to help get you up to speed before you start taking risks.
How do I invest?
You can start by consulting an expert, such as a Certified Financial Planner (CFP). They can help you integrate socially responsible investment options into your overall portfolio and provide advice on how to get started.
You can also check out the growing number of low-cost index funds available that focus on ESG investing. These are great ways to continue lining your investments with companies who are helping protect the planet while you sleep.
How can I invest responsibly?
There are two different approaches: negative screening and positive screening. Negative screens exclude certain industries and/or activities based on social or environmental criteria that
Who should be responsible for my investments?
There are a couple of different ways that you can set up your own SRI or ESG portfolio! Many investors choose to hire a financial advisor to build the perfect portfolio for their needs – but you can also do it yourself if you know what you’re doing. Today it is easy to get some help while you learn about investing strategies. Then over time, you can move from a managed portfolio to more of a self-managed portfolio as your knowledge increases. Courses are tailored to the individual which allows you to learn at your own speed and access advisors as you need.
How do I know what companies and funds are sustainable?
Whether or not you decide to manage the investments yourself or hire an advisor, understanding which companies are “responsible” is important before you jump in with both
When it comes to ESG investing, there are many different ways that you can use your money to support sustainable companies. The basics of socially responsible investing include looking at the environment, human rights, and other factors before deciding where to put your money. For indexed companies, this will be reflected in their ESG Score. But never take it at face value, as some companies have been known to exaggerate their sustainable claims. This is known as Greenwashing.
This also includes ensuring that your investments don’t invest in companies that have terrible records when it comes to social responsibility such as weapons, alcohol, and other harmful things. And don’t forget to check out how companies are treating their employees and stakeholders – because you want your investments working for the people!
What’s the catch with socially responsible investing?
There is no catch. When it comes to investing in ESG there really isn’t a downside. Like any investment, it might not always work out, but in general, companies who practice sustainable investing are more profitable which means you get a better return over time.
What should I know about sustainable investing before I invest?
- Check out the growing number of low-cost index funds
- Do your homework
- Do not guess (unless you have a lot of capital you don’t need)
- Read up on what you’re investing in
- Find their communications on websites and social media platforms
- Consult with a financial advisor familiar with ESG investing
- Take investment courses online
Like most things, in the beginning, there is a bit of a vertical learning curve. But as with most things, the more you know – the better off you will be. That’s why we recommend beginner investors start with investing courses. These affordable mini-investment courses are perfect for learning everything you need to know about socially responsible investment options and how to integrate them into your overall portfolio before moving on to other strategies.
In conclusion ESG funds and ESG factors
While there’s no one-size-fits-all answer to whether you should add them to your portfolio, here are a few things to keep in mind if you’re thinking about adding ESG investing to your portfolio. First, it’s important to remember that ESG is not just about divesting from certain sectors or companies; it’s also about investing in those that align with your values. So, do your research and find funds or companies that reflect your personal beliefs. Second, don’t be afraid to ask for help. There are plenty of resources out there for beginners, and financial advisors can help you create a portfolio that meets your specific needs. Finally, start small and gradually add more exposure as you become more comfortable with the idea of the factors involved with ESG investing. Like any type of investing, it’s important to be proactive and diversify your portfolio to minimize risk.
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SMEs and Investment professionals focusing on ESG principles. Their primary goal is to help middle-market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning, and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, UK, Europe, and the global community. If you want to get started, don’t forget to Get the Checklist! ✅