The last twenty years have seen a dramatic uptick in social awareness. From average spenders to high-income earners, people want their companies of choice to find ways to give back to society. In response, businesses around the globe have adopted this mindset, with customers lending a helping hand.
Some companies have sought to connect themselves with charitable or positive causes. Others have improved their ecological impact by reducing their carbon footprint and increasing the use of sustainable resources.
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It has gotten to the point where a company’s stance on ecological and social issues determines whether or not it will attract investors. For the average person, investing in socially driven businesses is known as ESG investing.
What is ESG Investing?
ESG Investing stands for environmental, social, and governmental investing. The core concept of ESG is that you decide your investment choices based on how a company runs itself. The factors that matter the most:
- Environmental – How the company’s manufacturing and production output affect the environment. This will include whether they use sustainable resources, produce recyclable products, and prevent environmental damage.
- Social – How the company treats its employees through wages and representation, and whether they participate in charitable causes or aid social justice.
- Governmental – What kinds of political contributions the company makes and what stances its members hold. The diversity and inclusivity of the company’s board of directors can also affect this. Has the company ever faced a lawsuit, internal corruption, or any form of public protest or lobbying?
ESG investing requires you to research and understand a company based on these factors, which will affect whether you choose to invest in it. The overall intention of this investment style is to provide support for companies that will drive environmental change. In short: you invest in doing good in the world by making companies do better.
ESG investing is also sometimes known as socially responsible investing (SRI).
Benefits of ESG Investing
Aside from the aforementioned global benefits, ESG investing also represents a pretty profitable venture for you as an investor. The Morgan Stanley Institute for Sustainable Investing published a white paper back in 2019 showing that sustainable funds returned similar profits to traditional funds. This was measured between 2004 and 2018, showing significant potential for these options. In some cases, the same sustainable funds outperformed traditional ones, proving that helping the world benefits your wealth-building plan, too.
The same paper also found that sustainable funds were less likely to suffer losses than traditional ones. During the less stable years of 2008, 2009, 2015, and 2018, there was a significant downside deviation for traditional funds, suggesting that sustainable funds had a lower potential for loss.
The Downsides of ESG Investing
Of course, it would be unfair and untrue to paint ESG investing as some magical, flawless investment choice. As with everything, there are a few downsides to taking up ESG investment opportunities.
The subjective nature of what can be considered an ecological, social, or governmental benefit means no clear-cut rules as to what will count. What one may consider a pressing social issue in one state may not be in another. This means certain companies may not be rated in a way you agree with.
What’s more, the very nature of some businesses immediately excludes them from being sustainable options. Companies that handle tobacco, gambling, alcohol, and weapons will not even appear on lists due to their volatile social standings.
A few companies may also sneak into a good ESG category, despite not complying with its requirements. The act of “greenwashing,” as it is known, is when a company presents itself as being highly eco-conscious and socially forward while doing nothing to support these things actively. In these cases, you can be sure that their value will plummet when exposed, making them precarious investments.
How to Get Started with ESG Investing
If you like the concept of ethically viable, sustainable investment, you’ll be happy to know that building your ESG portfolio is relatively simple. More and more investing platforms are getting on board with supporting ESG options, making learning what you need to know easier.
What are your values?
Your first step will be to recognize what your ethical ideals are. Put together a list of the values you hold most by answering the following questions:
- How should a company treat its employees?
- What ecological initiatives should they follow?
- How should they make their products?
- Do they need to be involved in politics?
- What kinds of goals do they have for the future?
Consider other ways the company should or should not behave, and you will have a set of parameters for your ideal investments.
Find suitable companies
Platforms such as Vanguard and Fidelity give you investment options with in-depth profiles. By researching their lists, you can find the companies that best align with your values and invest accordingly with their online systems.
If reading through dozens of company profiles seems like a little much, you also have plenty of investing strategy options. Robo-Advisors are AI programs that can help you build and maintain your ideal portfolio based on your risk tolerance and goal parameters. Some options to consider are:
- Betterment
- Merrill Edge Guided Investing
- Wealthfront
Make your investment
Once you know which companies best fit your ideals, you can begin investing through your usual investment platforms. Independent research firms like Morningstar are a great place to look if you want to see the ESG rating of your chosen companies. This can help you decide what level of investment you want to make and how well they are keeping up with their promises.
As the world focuses more and more on bettering itself, we can do much to support this effort. Through alternative investing like ESG, we can help shape companies’ future and dictate what kinds of social and ethical values they should work towards. After all, the best way to improve the world is to get behind the things we value most.
