It’s important to dig a little deeper and find out what these investments do – or do not – include so you can make sure they really line up with the things that are important to you. Let’s take a look at ESG Investing and how it can impact your portfolio..
First off, what exactly does ESG Investing mean?
It’s a form of Sustainable Investing and stands for Environmental Screens, Social Factors, and Governance Criteria. Investopedia.com perfectly describes Sustainable Investing as a way to direct “investment capital to companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility”.
ESG Investing Explained
These three categories are the basics that are included in almost any socially-conscious type of investment. After that, you want to be aware of any other screens that could vary from firm to firm.
Some will exclude things like alcohol or gambling. Others are very aggressive about screening out any types of firearms or controversial weapons.
Socially conscious investing means different things to different people. You want to make sure you are having the impact that you intended when you invested in the first place.
1. Environmental Screens
These will rank companies based on their environmental impact. This could include things like water or ground pollution, carbon output, or commitment to conservation efforts in the future. Generally, these will exclude many oil and gas companies as well as some heavy manufacturing.
2. Social Factors
These factors can run the gamut a bit. It can include a company’s stated commitment to equity and inclusion, ethical treatment of workers, percentage of women on the board, privacy of information and a variety of other things. It’s important for you to understand what’s being included or excluded from this category. Don’t be afraid to ask questions!
3. Governance Criteria
To put this in plain English, this means the company strives to avoid shady business practices. They want to make sure that their financial information is transparent for their investors and they are independently audited on a regular basis. These companies are committed to avoiding fraudulent activity.
What Are Some Limitations Of ESG Investing?
Understanding what you own is key to being a successful investor. A good advisor should be able to explain, in a way that makes sense to you, how your investments are helping you to meet your goals. There is a ton of information available on the web about ESG investing and the options that are available.
A financial advisor can help you whittle down those choices and make sure that your investing style matches your personal values.
1. Don’t Forget About Diversification
ESG investing, as with any type of investing, has its risks. While you may feel strongly about investing in solar power, for example, don’t neglect other areas of your portfolio.
If you are too heavily concentrated in any sector, regardless of background, you will be adding additional volatility risk to your portfolio that you may not have intended.
There are some great mutual funds and ETFs available that can give you exposure to many different sectors without sacrificing diversification. Ask your advisor what may work best for you.
2. Customization Comes Along With Cost
Your ESG Portfolio can range from very broad to extremely customized, but don’t forget that there are generally additional costs associated with excluding or including each type of investment. The additional costs may be worth it to you, or they may not make sense in your scenario.
In either case, make sure you understand what you are paying for and how it adds value to your portfolio.
Does ESG Investing Align With You
We see ESG Investing as a way to help our clients align their personal values and beliefs while still generating profitable returns.
Forbes recently published an article that describes the rising awareness perfectly. They said: “For many people, ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, customers, shareholders and the environment.”
Like all investing, an effective ESG Investing strategy still brings many inherent risks. Many ESG opportunities in the market stem from pursuing non-financial factors and require an in-depth survey to identify material risks and growth opportunities.
If you have questions on ESG Investing or Sustainable Investing opportunities, we invite you to start a conversation with our team.
