Environmental, Social and Governance (ESG) Investment – What Investors Need to Know
ESG investing is a type of investment strategy that considers the socially responsible operations of a company as a factor for your investments. While the concept of investing according to your values ââis not new, the term ESG and the ways in which it is measured are. But you can still use an ESG investing mindset when exploring and diversifying your portfolio.
What is ESG?
âESGâ, which stands for environmental, social and governance) was first coined in 2005, but the concept goes back much further.
âThe dual mandate of doing good while doing as well was first articulated by 17th century Quakers in England,â says Haleh Moddasser, CPA, senior vice president and senior advisor at Stearns Financial Group. “As an investment concept, the first iteration of the dual mandate was SRI (Socially Responsible Investment) where entire asset classes were excluded from portfolios, resulting in lower returns.”
What is ESG investing?
ESG investments have only increased in recent years, as non-financial factors like climate change or social justice have influenced investors, according to the CFA institute. Socially responsible investors want to prove that they can invest in the companies they care about while making money.
The first ESG-related investment was launched 50 years ago and has recently gained traction.
âThe first sustainable investment mutual fund launched in 1971 and focused on excluding certain companies for ethical reasons,â says Jason Hoody, CFA and head of investment manager research at LPL Financial. âIn the early 1990s, less than 30 companies provided ESG information, while today more than 8,000 companies publish information.
Take your investing to a different level by taking care of every security in your portfolio with ESG investing.
ESG investing involves analyzing a particular company, stock, or other investment security based on factors that are not always related to money.
Benefits of ESG investing
When you have the chance to invest in something that you truly believe in, the investment has an even greater impact. ESG investing has a few different benefits, according to Moddsasser.
âThe investor feels better in the companies in which he invests,â she says. âThis investor no longer has to support a company whose values ââcontradict his in terms of climate, equality and transparency.
Being an investor in a business gives you more power than you might think. While consumers drive change with their dollars, investors drive change with their dollars and voice.
âParticipation in shareholder resolutions and proxy votes actually promotes behavioral change in companies,â says Moddasser. âIn other words, the goal of ESG should not be so much to punish a business for bad behavior as it is to promote healthy change towards a more sustainable future. “
ESG investing allows you to align your investments with your values.
“Many of us see ourselves as values-driven individuals and yet have not gone so far as to carry those values ââto our finances,” said Brian Haney, Founder and Vice President of The Haney company. “However, now more than ever, we can vote with our portfolios and our Wall Street investments.”
ESG vs SRI vs CSR
With so many acronyms, it’s hard to know which one you want to follow. All of these are closely related, so it’s easy to get confused.
Environment, social and governance: ESG does not exclude entire asset classes, but weights them differently depending on the objectives of the portfolio.
Socially responsible investment: [SRI] focuses more on exclusions. By excluding entire asset classes, SRI portfolios can sometimes lag behind unconstrained portfolios.
Corporate social responsibility: CSR refers to the concept of being a good corporate citizen, while SRI and ESG are the investment mechanisms that investors can use to support these ideals.
How does a company meet ESG criteria?
While ESG isn’t new, it’s still very new to the way Wall Street regulates it.
âESG is still a relatively new concept that lacks both standardization and regulation,â explains Moddasser. âOften, corporate behavior is self-reported and ‘greenwashing’ can occur. [This is] where companies claim to be more sustainable than they actually are to gain favor with investors. “
Hoody says ESG criteria and ratings can differ from company to company, so it’s not an exact science when it comes to comparisons.
âA judgmental forecast of the impact of an ESG risk factor on a financial measure, such as future cash flows, may differ from investor to investor,â says Hoody. âFrameworks, such as materiality assessments or maps, are useful for providing advice, [but] ultimately leads to a range of opinions, just like traditional investment approaches. As a result, ESG ratings may differ from vendor to vendor.
As there is no one standard or one-size-fits-all approach to ESG investing, you will need to use all the data available to make your investment decisions. Use corporate reports, investor analysis, and investor reports to analyze a company’s ESG data. It may take a little longer on your part as an investor, so plan accordingly.
How to start investing in ESGs
If you want to be more intentional in your investments, now is the time to put your money where your conscience is. Start by understanding your own motivations and interests, then use the tools at your disposal.
âCommon motivations include reducing risk, improving returns, and achieving an economic or social outcome,â among others, says Hoody. âFor individual investors, it can be difficult to select individual securities due to the need to collect company-specific ESG information. [Investors may] need an intermediary financial product such as a mutual fund or an ETF.
âFinding a strategy or two, becoming more aware of the different approaches, and gradually increasing your portfolio’s exposure to sustainable investing is a common way to start,â says Hoody.
If you are looking for help, Moddasser advises you to find a financial company specializing in ESG.
âMany financial advisers are reluctant to ESG portfolios, despite their recent boom, and frankly are not well informed about them,â she says. âFind a consulting firm that has ESG knowledge and an ESG platform. [Specifically] one who is a trustee.