Environmental, Social and Governance (ESG) investing has become a hot topic in the financial world in recent years. What is it and is it a good idea? Here’s everything you need to know:
What is ESG investing?
According to NPR, ESG investing is “an investment choice that emphasizes social and environmental responsibility along with profit.” The investor evaluates potential companies based on how well they meet their environmental and social responsibilities and aggregates these results into an ESG score. Some of the factors that affect a company’s score are carbon footprint, level of diversity, and political contributions. More broadly, investing through an ESG lens means “how a company serves all its stakeholders: employees, communities, customers, shareholders and the environment,” he explained. Forbes.
Linda Zhang, senior advisor at online banking firm SoFi and CEO of Purview Investments, said ESG scores are assigned by research firms. “Rating companies rely on different criteria to evaluate each of the individual components of E, S and G.” Some popular ESG research firms include Bloomberg and JUST Capital. Individuals can also decide how they want to invest based on their own analysis and criteria.
“At its core, ESG investing is about affecting positive change in society by being a better investor,” said Hank Smith, Head of Investment Strategy at The Haverford Trust Company. He added that this form of investment implies that ESG factors improve the company’s bottom line. But ESG investing is not without controversy.
Why is ESG controversial?
The debate revolves around the question of whether this is just another form of greenwashing. ESG investing is “designed almost entirely to maximize shareholder returns, falsely leading many investors to believe that their portfolios are good for the world,” said Hans Taparia, clinical associate professor at New York University’s School of Business, in New York Times. Taparia said companies like Meta, Alphabet and – “most notably” – BP and Exxon have “respectable” ESG ratings. In fact, Coca Cola Co has been labeled an “ESG leader” even though its single-use plastic production is responsible for more pollution than any other company in the world. Stupid motley.
But that doesn’t mean ESG investing has no value. Some studies suggest that ESG investing may be more sustainable than others. As Investopedia explained, ESG investors can “avoid the explosions that occur when companies that operate in risky or unethical ways are ultimately held accountable for the consequences.” The data from 2022 also speaks to the robust nature of ESG products, which in a very volatile year “managed to perform in line with the overall market” while attracting new money, “a good sign for the future of responsible investing,” he concluded. CNN Business.
ESG investing is also a way to support causes like labor rights and climate action in your own right. Investors can “make sure they’re not investing in companies that contribute to or contribute to these problems, and invest in those that are champions of leading ESG movements,” Zhang says.
The key, as with any investment, is to exercise responsibility.
How can I get into ESG investing?
Start by defining your own ESG values and doing some research. Through a brokerage account, you can invest in individual stocks yourself or in ESG funds. Buying individual stocks is fine if you have a specific company in mind. Check out their impact report, which “shows any sustainability or cultural initiatives they’ve implemented and how they’re addressing issues like carbon emissions.” NerdWallet said But “funds can quickly fill your portfolio and can instantly diversify your assets,” the personal finance site added. When investing in an ESG fund, there is an expense ratio that needs to be considered, meaning “you may pay a small premium to invest in funds that focus on ESG criteria”. Forbes. Mike Walters, CEO of USA Financial, commented that these ratios are not as high as they used to be, “but they are still higher than other funds on average.”
Sometimes it is difficult to determine what are good investments to begin with. Newbies can enlist the help of a robo-advisor that “builds and manages investment portfolios based on your risk tolerance and goals.” NerdWallet. Some examples are Betterment and Merrill Edge Guided Investing. If using a robo-advisor, it’s important to know how the advisor invests because each one is different. But it can be a low-cost and simple way to get into ESG investing without much knowledge or experience.
You can also hire an ESG financial advisor who can help you create a portfolio tailored to your values and financial goals.
Rachel Robassiotti, founder and CEO of Adasina Social Capital, advises asking questions like: “What is the issue you care about or want to impact? How do you measure that issue and your impact? And you Who are you working with to do this?” It’s also important to remember that investment alone isn’t necessarily enough to pressure companies to improve their behavior, and political action is needed to create significant social change, he said. Vox.