- Environmental, Social, and Governance (ESG) investing refers to a form of investment.
- This offers investors positive returns while also creating a positive impact on society and the environment.
- ESG investing works much like contributing to small businesses that you believe in.
ESG is a form of sustainable investing that takes into account the impact that the business has on the environment, society and corporate governance.
How does ESG work?
With these types of investments, each factor is scored to be eligible to be considered an ESG investment. Here is a breakdown of how that works:
- Environmental impact
This parameter measures how the company’s operations impact the environment. This includes how greenhouse gas emissions are managed, if natural resources are used efficiently, if the products created are sustainable, and how products are recycled. The positive impact that this has is minimizing any environmental liabilities, lowering costs, and increasing profitability.
- Social impact
This parameter involves assessing how the company contributes to the development of the community. During this assessment, factors such as equal opportunity hiring, diversity in the workplace, providing fair lending and affordable housing, promoting health and safety, and human rights protection. The positive impact that this could have on society is increased brand loyalty, increased community morale and productivity, and reduced turnover.
- Corporate governance impact
This parameter involves assessing the way the company runs. This includes the company’s board, corporate brand independence, protection of shareholder rights, how information is disclosed, and reasonable pay. The parameter positively impacts how the shareholders’ interests are aligned and managed and minimizes financial uncertainty.
Why you should consider ESG investing
If you are interested in the ethical aspects of your investment, ESG investments are options that you should consider. An ESG investment helps with creating an ethical portfolio and helps promote issues that you care about.
Apart from just earning returns on your investment, your investment also indirectly affects how the future of the world is shaped. Furthermore, companies that do not consider the environmental and social impact of their practices tend to run into a number of problems in the future.
Publicly traded companies are usually the ones to which ESG criteria apply. An investor who is concerned with the ethical aspects of a business is more likely to make ESG investments. An added advantage of making ESG investments is that it offers investors a lot of flexibility.
Experts have also revealed that ESG investments help with lowering risks when compared to traditional investments. There are varying opinions on how ESG investments perform but, for the most part, it has been observed that ESG investments perform just as well as, if not better, than traditional investments.
How ESG investing is different from Socially Responsible Investing (SRI)
SRI began in the 1970s when investors steered clear of investments related to guns, tobacco, adult entertainment and any other industries that are considered immoral. These industries were viewed as socially irresponsible.
ESG investing is to some extent based on SRI. It does look at the social responsibility of a business in terms of the overall impact that it creates. ESG includes businesses that are socially responsible in addition to omitting those that aren’t. SRI primarily focuses on the exclusion aspect when determining social responsibility.
How to start investing
There are several options to choose from if you are looking into ESG investing. Here’s how you can begin creating your portfolio:
- The first step to ESG investing is to decide if you want to cherry-pick your investments on your own or hire a professional to help you choose. Once you’ve made that decision, you will have to create a brokerage account. The process of adding ESG investments on your own can be a bit tedious when compared to using a Robo-advisor that can build and manage your portfolio for you.
- Get familiar with the policies of your investment. Each ESG investment has its own set of values within the parameters of what they consider socially responsible. Make sure you read up to make sure your values align with that of the company.
- When choosing your investments, you can either pick individual stocks to invest in or choose a mutual fund that has ESG stocks as part of the investment portfolio.
Pros and Cons of choosing ESG Investments
|ESG investments have been performing exceptionally well in the recent past.||In some cases, more lucrative investment opportunities may be overlooked.|
|There is a lot of personal satisfaction that investors get from making socially responsible investments.||ESG investing requires a lot more research compared to other investments.|
|ESG investments have been shown to help lower investment risks.||The legitimacy of a company that claims to be ESG is always up for debate.|
Should you invest?
There are no concrete rules about who can and cannot make ESG investments. ESG investments can be incorporated with your existing portfolio by making minor tweaks to your investment style. Furthermore, ESG investments have been doing exceptionally well in the recent past and can help you earn a decent amount in returns even if the amount you invested in your traditional investments are minimal.