Here Is Everything You Need To Know About ESG: A Socially Responsible Way of Investing

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ESG investing is a type of investment strategy that considers a company’s corporate social responsibility as a factor in your investments. While the concept of investing according to your values ​​is 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?

“ESG”, which stands for environmental, social and governance) was first conceived in 2005, but the concept goes back much further.

“The dual mandate of doing good and doing good was first articulated by 17th-century Quakers in England,” said Haleh Moddasser, CPA, Senior Vice President and Chief Adviser at Stearns Financial Group† “As an investment concept, the first iteration of the dual mandate was SRI (socially responsible investing) where entire asset classes were excluded from portfolios, resulting in lower returns.”

What is ESG investing?

ESG investing has only increased in recent years as non-financial factors such as climate change and social justice have impacted investors, the report said. CFA Institute† Socially responsible investors want to prove that they can invest in companies they care about and still make money.

The first ESG related investment launched 50 years ago and gaining popularity recently.

“The first sustainable investment fund launched in 1971 that focused on the exclusion of certain companies for ethical considerations,” said Jason Hoody, CFA and Head of Investment Manager Research at LPL Financial† “In the early 1990s, fewer than 30 companies provided ESG information, while now more than 8,000 companies publish information.”

Pro tip

Take your investments to another 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 linked to money.

Benefits of ESG Investing

When you get the chance to invest in something you really believe in, the investment has an even greater impact. According to Moddsasser, there are a few different benefits to ESG investing.

“The investor feels better about the companies he or she invests in,” she says. “This investor no longer needs to support a company whose values ​​contradict their own values ​​on climate, equality and transparency.”

Investing in a company gives you more power than you think. While consumers cause change with their dollars, investors cause change with their dollars and votes.

“Participating in shareholder resolutions and voting proxies actually promotes changes in corporate behavior,” Moddasser says. In other words, the goal of ESG should not be so much to punish a company for bad behavior as to promote healthy change towards a more sustainable future.

ESG investing helps align your investments with your values.

“Many of us consider ourselves value-oriented individuals and yet haven’t gone so far as to carry those values ​​all the way through to our finances,” said Brian Haney, the founder and vice president of The Haney Company† “But now more than ever we can vote with our wallets and our investments in Wall Street.”

ESG vs SRI vs CSR

With so many acronyms, it’s hard to keep track of which one to follow. All of these are closely related, so it’s easy to get them mixed up.

Environment, social and governance: ESG does not exclude entire asset classes, but weights them differently depending on the objectives of the portfolio.

Socially responsible investing: [SRI] is more focused on exclusions. By excluding entire asset classes, SRI portfolios can sometimes lag 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?

Even though ESG isn’t new, it’s still very new in how Wall Street regulates it.

“ESG is still a relatively new concept and it lacks both standardization and regulation,” Moddasser says. “Companies’ behavior is often self-reported and there may be ‘greenwashing’. [This is] where companies claim to be more sustainable than they actually are to win the favor of investors.”

Hoody says ESG criteria and assessments can vary from company to company, so it’s not an exact science when it comes to comparisons.

“A prediction of judgment about the extent to which an ESG risk factor will affect a financial metric, such as future cash flow, can vary from investor to investor,” Hoody says. “Framework, such as materiality assessments or maps, are helpful in providing some guidance, [but] ultimately leads to a range of opinions, much like traditional investment approaches. As a result, ESG ratings can differ per provider.”

Since there is no one universal standard or approach to ESG investing, you should use all available data to make your investment decisions. Use corporate reporting, investor analysis, and investor reporting to analyze a company’s ESG data. This may take a little more time on your part as an investor, so plan accordingly.

Getting started investing in ESGs

If you want to be more conscious with your investments, it’s time to put your money where your awareness is. Start by understanding your own motivations and interests, then use the tools available to you.

“Common motivations include reducing risk, improving returns, and achieving an economic or social outcome,” Hoody says. “It can be difficult for individual investors to select individual securities due to the need to collect company-specific ESG information. [Investors may] need an intermediate financial product, such as a mutual fund or ETF.”

Hoody suggests looking at the US SIF List as a good starting point. It’s also a good idea to start small; you don’t have to review your entire portfolio overnight.

“Finding one or two strategies, becoming more aware of different approaches, and slowly increasing your portfolio’s exposure to sustainable investing is a common way to start,” Hoody says.

If you’re looking for help, Moddasser says to look for a financial company that specializes in ESG.

“Many financial advisors are resistant to ESG portfolios, despite their recent rise, and frankly aren’t well informed about it,” she says. “Find a consultancy with ESG knowledge and an ESG platform. [Specifically] a confidant.”

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