ESG 101: Socially Responsible Investing for Beginners
Many people have heard of “voting with the dollar.” But, what about “voting with investments?” Similar to buying from eco-friendly brands or businesses that give back to their local communities, consumers have a choice when it comes to where they opt to invest their dollars.
Some younger investors are choosing to prioritize the societal and environmental impact of their money. In the investing word, socially responsible investing is often referred to as ESG (Environmental, Social, and Governance).
Still, the idea of socially responsible investing can seem time-consuming, costly, and even plain confusing to the uninitiated. After all, how can a potential investor know if the companies, funds, and stocks they invest are working to benefit society or the environment?
To help break down the misconceptions around ESG, SoFi’s Senior Manager of Financial Planning, Brian Walsh, (digitally) sat down with Brie Williams, head of practice management at State Street Global Advisors, to learn about the changing landscape of socially responsible investing.
Breaking Down ESG
The latest trend in socially responsible investing, ESG stands for Environmental, Social, and Governance. “These issues are assessed during the investment process,” explained Williams, making an investment not only financially driven, but ethically minded.
A company might not align with all of an individual’s ethical priorities, but depending on what an individual investor personally values, investing in that business may still be the right fit for some. “Reasons for investing won’t be one size fits all,” Williams said.
Naturally, each ESG factor might be researched and weighed a little differently. Individual investors might prioritize different values. So, it’s likely that personal beliefs and values could shape the choice of where and who to invest with.
Environmental factors assess a company’s impact on the earth, examining the extent to which different businesses benefit or harm the natural world.
Such factors might include a company’s stance on climate change, its policies surrounding pollutants, carbon footprint, use of renewable energy, production of green products, or reliance on energy-efficient technology.
According to Williams, investors could explore the organization’s sustainability reports to research a company’s environmental impact. Williams also recommended investors look for reports prepared in accordance with Global Reporting Initiative (GRI) or Principles for Responsible Investing (PRI) standards.
Investors could look up environmental initiatives on the company’s site as well, said Williams, but the information there can be taken with a grain of salt. “Look for concrete numbers and metrics, not just goals,” said Williams.
Social elements encompass working conditions, health and safety, and a company’s impact on local communities. A company’s social imprint may cover anything from the way it treats employees, to its reputation with customers.
Social factors could span employee pay, benefits, and perks, diversity and inclusion, equitable hiring practices, advancement opportunities, and ethical supply chain sourcing, too.
Williams said that Information about a company’s social policies can be found in GRI and PRI reports.
But, Williams continued, an investor’s view of a company’s social impact might also be informed by their personal experiences as consumers.
“Investors can be students of the business as the consumer. Look at rankings, research lobbying efforts,” Williams said.
Governance, or Corporate Governance, refers to the company’s management style. This may include the diversity makeup of the board and management team, in addition to business’ transparency with shareholders.
Interested investors can examine a company’s governance in several ways. They could look up the company’s history with the SEC (Securities and Exchange Commission) to see if any lawsuits have been brought. They can also search for accurate and transparent accounting measures within the company: do investors get a fair chance to vote on proposed measures?
In addition to researching investors’ say in a given company, governance-minded investors may want to look into executive compensation, lobbying efforts, and philanthropic initiatives.
Starting to Explore ESG
A deep dive into ESG research can feel intimidating and exhausting. Williams recommended that beginners start with three steps:
1. Clarifying Motivation
Investors could consider which issues are most important to them before researching companies. In practice, this might mean prioritizing green investment or looking to companies with initiatives that promote gender equity.
From investor to investor, the exact values to prioritize will vary significantly. So, before investing, individuals could zoom out and think over what is most important to their core values. There’s no right or wrong way to rank social issues. Still, having a clear list of moral or social motivations can help clarify future investment choices or avenues of research.
2. Exploring Solutions
Once investors have a clearer sense of their ethical motivations, they might want to think about which investing solutions fit their goals. It may be helpful to evaluate the time and money tied to specific investment choices. How much does an investor have to spend? How hands-on do they want to be with ESG research? What kind of fees are they comfortable with?
Depending on the time and money available, an investor might choose a more affordable automated investing or a more personalized, hands-on investment experience.
3. Aligning Values with Financial Goals
Finally, investors can explore what their long term investment goals look like. Do ethical business solutions align with investors’ monetary objectives?
Rates of return vary with each investment. So, it’s possible that an investor might have to decide between long term gains vs the societal (or environmental) impact of their investments. However, this doesn’t always hold true with all ESG investments or funds.
Understanding ESG: Fact and Fiction
In Williams’ experience, ESG is a big buzzword in investing. But, Williams noted, there are still some commonly held misconceptions about ESG investing. Williams said that many beginner investors don’t think they have the time, money, or experience to invest in ESG.
Williams went on to explain why even some common assumptions about ESG investing aren’t necessarily true:
Investing in ESG Always Means Sacrificing Returns
Traditionally, ethical investing has been seen by some investors as a high-minded “luxury” (but not necessarily a profitable investing strategy).
“It’s a valid concern, but so far those concerns have proven to be unfounded,” Williams explained, citing studies that put returns from ESG and traditional investing neck and neck.
“There’s lots of research out there that says companies today, when managed responsibly, deliver better returns in the long run,” said Williams. A corporation can do good for the world and run a profitable business. In fact, according to S&P research Williams said, many ESG funds are outperforming the S&P 500.
Contrary to popular belief, it’s possible to invest ethically and not necessarily sacrifice on returns.
Researching ESG Is Time Consuming
Finding the right socially responsible company to invest in will probably take a little more research than traditional investing, reasoned Williams. But, it needn’t eat up too much of an investor’s time. As socially responsible investing grows, more investment firms are scoring companies on their ESG policies, Williams said. As long as these firms are credible, they may cut down on a person’s research time.
Before extensive research takes place, an investor may be able to save time by deciding which values matter foremost to them when investing. An investor might choose solely to focus on companies with diversity in the boardroom, or green policies. “This choice is deeply personal,” Williams explained, “everyone treads a different line between good return and abiding by personal values.
If an investor maps out what’s important to them first, they might then focus on identifying companies that share those ethical commitments. Narrowing the field of companies to invest in could cut down on the time needed to research.
Thinking ESG Investing Is Expensive
One additional assumption is that ESG investing is expensive. This misconception is tied to the idea that ethical investing is a luxury—presuming that ESG investing means more fees and expensive professional help. As ESG investment strategies grow in popularity among younger and millennial investors, Williams noted, alternatives are trending towards lower-cost options.
“ESG ETFs can democratize access to investment vehicles. They’re often more affordable,” Williams said.
On the other hand, if an investor does choose to work with a fund manager to explore ESG, they could potentially save some time, since the manager will do much of the research for them.
As with any other financial strategy, there are more affordable and more expensive ways to pursue socially responsible investing.
With a little pre-planning and research, marrying ESG and investing goals isn’t as complicated as has generally been assumed.
Socially conscious investing may be one way for individuals to feel more confident that their investment money is being directed toward companies that claim to benefit society and the environment.
For ESG novices, though, getting started can be confusing. That’s where SoFi can help. SoFi Invest members can consult a financial advisor at no additional cost. In that call, potential investors can discuss how to sync their core social values and investment goals.
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