If it feels like you’ve been hearing more and more about “ESG investing,” you’re not alone. Although an ESG investing framework has existed for decades, it is truly within the last few years that ESG has gone mainstream with a wider audience of investors.
But what does ESG stand for? Does it differ from other investment philosophies? Here’s what you need to know.
What is ESG investing?
ESG investing considers a company’s track record when it comes to the environment, social equity, and corporate governance (ESG). ESG investors seek to maximize their investment returns while limiting risk. Where they differ, however, is in the consideration of these additional factors.
Companies that earn high environmental grades may produce, or invest, in products that help clean wastewater or generate renewable energy. They may have a concrete plan for reducing greenhouse gases from operations or source their products sustainably. Companies that score poorly here may produce products that yield environmental hazards or contribute to greenhouse gas production.
Companies that score highly in social measures demonstrate a commitment to their workforce and the communities in which they do business. These companies will have diverse workforces, fair hiring practices, competitive compensation and products sourced without labor exploitation. Companies that score poorly here may have a history of human rights violations, workplace issues and other business practices that are a burden on the workforce or surrounding community.
Finally, governance is focused on how a business is managed. Companies that rank highly in governance allow feedback from shareholders, maintain a diverse board, communicate transparently, and use fair and open accounting practices. Companies that rank lowly here may have run into issues with the SEC and shareholder lawsuits, deceptive leadership and executives with questionable pay incentives.
Where to find ESG information
If you’re interested in ESG investments and want to learn more about a particular company’s track record, you have a couple of different options to get this information.
You can do your own research into a company to gauge a company’s track record on environmental, social, or governance-related issues. Many companies have pages on their websites dedicated to their social and sustainability initiatives, which can be a good source of information. Third-party data firms have built out frameworks to independently evaluate and score a company's ESG credentials. Oftentimes, you’ll see an ESG scorecard on a stock or fund website.
Of course, it’s also worth noting that a company’s financial performance is also an important consideration before you make an investment. If a company scores high on issues related to ESG but does not turn a profit or is at risk of losses, you may need to think twice about investing, even if you agree with its mission.
If you are working with a financial advisor or wealth manager, or considering doing so, ESG is a good reason to seek advice. An advisor can provide a personalized approach to ESG investing. They can get to know your values and opinions and help you understand the many different options available to invest in ESG. They can also help you to integrate ESG investing into your broader investment and financial plan. This can help ensure that you are getting the growth you need to help achieve your long-term financial goals while helping further ESG causes.
All of this is, admittedly, is a lot to consider. The good news is that many financial advisors and wealth managers are happy to consider your values and passions when constructing a tailored investment portfolio.