In recent years, US investors’ strategies have begun mirroring rising concerns over corporate transparency, environmental impact, and social responsibility. Naturally, different motivations will drive different investors.
But, more and more investors are opting to put their hard-earned money into companies that, they believe, might shepherd in a brighter future for society and the natural world as a whole.
This growing move toward socially responsible investing is commonly referred to as ESG—with the letters standing for environmental, social, and governance factors.
On top of more traditional financial considerations, these three factors are behind some socially conscious investors’ decisions to build out a more sustainable investing portfolio.
From 2016 to 2018, for instance, sustainable assets grew from $8.7 trillion to $12 trillion in the U.S. Turning a profit can have a bigger purpose.
With sustainability becoming a popular investment trend, the corporate bottom line is not the only factor determining where some investors choose to invest their dollars. Some investment research firms, like Sustainalytics, have even started rating companies and funds based on their adherence to a variety of ESG factors.
There is, however, no universally shared set of ESG criteria used by all investors or financial firms to evaluate a company’s soundness or risk along these lines.
According to a report published by Harvard Law, some financial firms consider at least 70 indicators to evaluate ESG issues. Because what individual investors consider socially responsible could vary from person to person, it can be difficult to quantify what ESG stands for.
So, what is ESG investing? Below is a more detailed overview of what ESG means. There’s also a discussion of how investors might want to use socially responsible criteria when picking which assets to purchase (and, perhaps, which ones to divest from).
ESG Investing Overview
A company’s impact on the environment can influence an investor’s desire to buy into a specific corporation or stock. Before investing in a given corporation or fund, many younger people are asking companies to prove their ability to be safe keepers of the natural world.
Some factors that environmentally conscious investors may want to evaluate may include:
• Pollution and carbon footprint
• Green products
• Recycling and safe disposal
• Water usage and H20 conservation
• Violations with the Environmental Protection Agency
• Renewable energy integration (such as solar and wind)
• Climate change policies
Rather than relying on corporation’s self-reported data or claims, some investors prefer to turn to third-party institutions, like the Global Reporting Initiative , to find sustainability reports.
When it comes to ESG investing, the term ‘social’ generally describes the impact of a company’s relationships—from who a corporation chooses to work with to how it treats employees, from whether the company shares in the investor’s ethical values to how (or whether) it helps out the local community.
Some other social factors can include:
• Employee safety, training, engagement and development
• Employee pay, benefits, and perks
• Consumer friendliness
• Perception of management
• Diversity and inclusion
• Lobbying efforts
• Commitment to social justice causes
• Ethical supply chains (no sweatshops, conflict-free minerals, etc)
Factors as varied as corporate culture, commitment to diversity, and how much a company invests in local organizations or communities can impact socially-conscious investors’ decisions whether to buy (or not) into a specific corporation.
Corporate governance encompasses how the board of directors, company, and shareholders relate.
How is the business run? What decision-making power is conferred to shareholders vs. management? How transparent is the company with the public and those who invest in it?
Some additional factors that could be evaluated for ESG investing may include:
• Executive compensation, bonuses, and perks
• Diversity of the board of directors and management team
• Transparency in communications with shareholders
• Relationship with regulatory bodies such as the Securities and Exchange Commission
• Rights and roles guaranteed to shareholders
• Accountability of management and board of directors
Investors interested in questions of governance may want to check out sustainability reports or annual proxy statements, which are filed with the US Securities and Exchange Commission .
What are the Benefits of ESG Investing?
One of the main benefits of ESG is adopting an approach to investing that, from the outset, it strives to be holistic and inclusive. It’s not only about obtaining a financial return.
Applying the principles of sustainable investing could help align investors (and, by consequence, traded corporations) with the broader concerns in society.
Examining investments through the lens of environmental, social, and governance factors may help investors create portfolios that boost global progress in these three areas, allowing investors to sync their values with companies that share them, too.
For those who want their investments to reflect their deeply held values—putting their money where their mouth is, so to speak—ESG investing is oneoption, especially if sustainability is a major concern.
Another reason why ESG investing has a growing body of support is changing consumer behavior. Many younger consumers are demanding that companies take measurable, public stances on core ESG issues.
Companies that refuse to account for these issues in their business plans might reap financial pain in the future—especially if either consumers or investors then carry their money elsewhere out of dissatisfaction.
Beyond aligning investments with broader social causes, ESG investing can also offer competitive financial returns. Although it was once argued that investing using ESG strategies would not be as competitive as other, less-holistic strategies, the numbers often prove otherwise.
For example, in 2019, two ETFs that track indices have yielded returns similar to benchmarks, such as the S&P 500. Further research supports the claim.
A white paper published by Morgan Stanley in 2018 reported that no financial trade-off was found after comparing sustainable funds to traditional funds over a 14-year period.
What are ESG Strategies?
Investors have a variety of options for implementing ESG investing. According to a report prepared for the U.S. Department of Labor, there are a number of ESG investing strategies. Here’s a helpful breakdown:
• Positive screening/best-in-class: Investments have positive ESG factors relative to industry peers.
• Negative/exclusionary screening: No investments connected to activities or industries deemed controversial or unacceptable are included.
• Impact investing: Returns might be below the market; the focus is on investments that generate positive social and environmental impact.
• Sustainability thematic: Assets are related to sustainability.
• Index based: Investments match established indices of environmentally and socially responsible companies.
• Direct corporate engagement and activism: Promote adoption of ESG practices by working directly with corporations.
One last option, ESG integration, is one of the more popular strategies. Below is a summary of how ESG integration works:
ESG integration is the systematic and explicit inclusion by investment managers of environmental, social, and governance factors into financial analysis.
It’s commonly thought of as the strategy that is sustainable minded, yet still has a primary goal of financial gains. In contrast, impact investing is more concerned with societal reach.
ESG integration involves evaluating investments for traditional metrics, like capital allocation and cash flow, alongside ESG factors. Some of these financial and non-financial factors might include things like, qualitative analysis, quantitative analysis, investment decision, and active ownership assessment.
There are many different approaches available for ESG integration. So, the specific track taken by individual investors or financial planners will vary according to the monetary and societal goals that are being prioritized.
What Are ESG Investments?
ESG investments can be found across industries. There are a number of funds and stocks to choose from. Whether an investor decides to work with a financial advisor, or, to invest on their own, there are a number of ways to find sustainable investments.
Some companies do provide ESG ratings, so investors can see how a particular company measures up. One word of warning—ratings might significantly differ between rating entities.
There is no standardization. Each rating company can use their own separate ESG methodology. It might be worth becoming familiar, then, with how each rating agency measures ESG factors before using them to help direct investment choices.
History of ESG Investing
Investing with the goal of creating a positive impact on society or the world has been around for decades. Still, the term ESG investing first appeared in 2004 in a U.N. report about developing guidelines and recommendations on how to integrate ESG issues in asset management.
The emergence of ESG investing can be traced to the 1960s and 1970s, when socially responsible investing debuted. This type of investing ran counterpoint to shareholder value theory—the social responsibility of companies to maximize profits at all costs, to drive shareholder returns.
As society has evolved and sustainability initiatives have gained traction, a focus toward investments that are more ethically sound helped buoy support of ESG investing.
How to Get Started Investing
For those new to investing, it’s no longer such a hurdle to get started. Gone are the days where investing required a stockbroker or investment advisor and in-person meetings. To get started, potential investors have the option to open an online investment account.
One online option is SoFi Invest®—a digital-first investing platform, where users can get started with stocks, ETFs, and crypto. Users also gain access to daily business news and actionable insights curated for them.
Those who’d prefer a more hands-off approach have the option to invest in an automated portfolio, instead of choosing individual investments all by themselves.
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