Donating money to your favorite causes isn’t the only way to positively impact the world. Many investors are dipping their toes into ESG investing.
ESG stands for environmental, social, and governance-focused. It’s an investment strategy that allows you to focus your portfolio on companies that seek to make a positive, long-term impact on the world and society.
What is ESG Investing?
ESG investing goes beyond reviewing financial factors to find investment opportunities. Instead, it includes an in-depth review of non-financial metrics to identify companies with sustainable and ethical businesses that share your values.
· Environmental factors can include efforts to reduce or eliminate greenhouse emissions and protect fresh and saltwater sources.
· Social factors span the gamut of direct community involvement, to hiring missions, to protecting the human rights of employees in other countries.
· Governmental factors refer to how the company is run. What percentage of board members and executives are women or people of color? Do they represent diverse backgrounds socially, educationally, experientially, and generationally?
Investors not only enjoy the altruistic experience of investing ethically, but they can also make a profitable return on their investment.
You can narrow down your ESG investing to particular sectors like water sustainability or women’s leadership. Alternatively, you can cast a wide net and support across multiple elements for a more diverse portfolio.
Is ESG Investing Right for Me?
ESG investing has grown significantly over the past 15 years as a new generation enters the market with the power to influence the way corporations do business. In addition, more women and millennials are inheriting assets, and they tend toward being socially responsible with their wealth.
When deciding if it’s right for you, consider your motivations. Ask yourself, “What matters most to me?” For example, if protecting the environment tops your list of priorities, ESG investing could be the right path for you. You can add companies to your portfolio that support efforts to reduce or eliminate greenhouse emissions and protect fresh and saltwater sources.
If you’re not sure which companies fit your criteria, consider working closely with an investment professional for advice on which investments make sense to add to your portfolio.
How Can I Get Started?
Adding environmentally, socially, and governance-minded investments to your portfolio need not be overly complex. You can get started in several ways. One way is to take a DIY approach. You might research ESG companies and narrow your list down to a handful of candidates.
However, building an investment portfolio takes time, especially when finding investments that match specific criteria. A financial advisor, like a CFP®, can make the process easier. They’ll discuss your interest in ESG investing and find investments that match your values, risk tolerance, and goals.
When creating your ESG portfolio, you’ll likely build from three types of investments:
· Individual stocks are a good choice if you really like a particular company and think it will perform well over time. If the company offers an impact report, it will show you any sustainable or cultural initiatives the company focuses on. Reviewing the reviews on a site like Glassdoor can give insight into its work environment and how it treats employees.
· Mutual funds can help you quickly diversify your portfolio. Several ESG funds are available, and you can find ones that focus on specific issues. For instance, you might consider funds that center on green energy or fair wages and labor standards.
· ETFs, or exchange-traded funds, often have lower investment minimums than mutual funds. However, like mutual funds, ETFs can add diversity to your portfolio and have ESG-focused funds available.
Whichever path you choose, you must examine what’s important to you. ESG follows pretty clear guidelines, but values differ from one person to the next. Just because an investment fits within ESG boundaries doesn’t mean it’s the right fit for your beliefs.
Final Thoughts on ESG Investing
ESG investing can be incredibly rewarding. When reviewing investment options, make sure you understand precisely what you are investing in and what role it will play in your overall investment goals.
You have the potential to reap excellent financial benefits, but you can also sleep better at night knowing you’re helping propel sustainable, ethically, and socially conscious companies into success.
