In times when global warming is an impending threat, social inequalities prevail, and companies’ management often needs improvement, Environmental, Social, and Governance (ESG) investing is a sensible strategy to use.
In ESG investing, a company’s behavior and policies are rated according to 3 criteria:
- Environment: Does this company make an effort to reduce its carbon footprint? Does it treat its water before returning it to the natural flow? Does it get its raw materials from sustainable sources? What’s its overall impact on the environment?
- Social: Does this company seek to achieve equality at all levels? Does it enforce the non-discrimination policy? Does it constantly train and educate its employees and executive suite toward inclusion? Do they have a positive impact on the community and/or the country where they’re located?
- Governance: Are the corporate leaders diverse? Do they look to make positive change? Do they tend to the shareholders with integrity? Are the pay and benefits fair for all employees?
Who Scores the Companies?
Specialized ESG research firms review a series of elements from a company to define not only its compliance with ESG criteria but also the risks of being ESG compliant. Because doing things in a new and different way brings new and different risks.
Among the most prestigious ESG research companies, we find Refinitiv, MSCI, JUST Capital, S&P Dow Jones Indices, and Bloomberg. ESG audits are still evolving. Currently, these audits review a company’s long-term results, its performance in its market sector, and its compliance with the ESG criteria as measured via its reports, environment impact, overall management, and board and executive-suite compensations.
Why Choose ESG Investing?
There are a lot of factors to consider when investing including how your investments impact real, tangible things happening in the world today. Making considerate investment choices is not only reasonable but responsible.
Aligning your values with your investments is logical and fulfilling. As part of your financial growth strategy, you can invest in a company actively working to make a positive change in society and the environment. At the same time, you can seek to avoid investing in a company whose actions are not providing a positive impact.
Investing responsibly doesn’t mean giving up gains or donating money. Rather, it is choosing to invest in companies that better what you think needs improvement — being productively and allocatively efficient.
This study states that “companies that incorporate Environmental, Social and Fair Governance (ESG) factors show lower volatility in their stock performances than their peers in the same industry, that each industry is affected differently by ESG factors, and that ESG companies generate higher returns.”
There are a few caveats. For one, ESG indexes contain a high percentage of tech companies, so it’s important to diversify. Second, ESG funds have a slightly higher expense ratio than other funds on average — but these expense ratios are trending down year over year.
ESG Investing by Yourself or Asking for Help?
To invest on your own, you could perform a quick web search to look for the best ESG stocks list. The rating scale used is 0–100 with higher scores given to companies that best comply with the ESG criteria. Check out these ESG success stories to get a better idea of what a company does to be compliant.
Or you can ask for advice. A financial advisor with your best interests at heart can make the best choices for your individual goals, “focusing on the forest, not the trees.” Your financial advisor can define an investing strategy that targets stocks that align with your values in any criteria of the ESG triad — choosing the ones with high ESG ratings. Their experience and savviness can save you time and money.
Whether you have an advisor or are looking for one, ask about ESG options, costs, risks, and returns. With ESG investing, you are contributing to making the world a better place.
If you found this blog helpful for achieving your financial goals, please feel free to leave a comment or reach out to me via Twitter. Should you need help with financial growth strategies, please visit my company’s website, LexION Capital.
Elle Kaplan is the founder and CEO of LexION Capital, a fiduciary wealth management firm in New York City, serving everyone who feels left out by traditional “Wall Street”, including women and the families they love.