This is a collaborative post with Lyle, Principal Attorney at Oak View Law Group and Greg, CFA
Many investors are becoming interested in investing in sustainability. ESG is an acronym that stands for environmental, social, and governance. These are a few non-financial factors that investors use to assess the sustainability of an investment or company.
Environmental factors examine how a company preserves natural resources, while social factors determine how a firm treats people both inside and outside the organization. Governance factors look at how a business is run.
What Is ESG investing?
ESG investing is a sustainable investing that evaluates an investment’s financial returns as well as its overall impact by taking into account environmental, social, and governance factors. The ESG score of investment measures its long-term viability in those specific categories.
Some Of The factors That ESG Investing Takes Into Account Are:
- Carbon dioxide emissions
- Air pollution
- Water pollution
- Initiatives for renewable energy
- Waste disposal
- Water consumption
- Gender diversity
- Data protection
- Customer gratification
- Sexual harassment policies in the workplace
- Human rights in the United States and around the world
- Labor practices
- Contributions to politics
- Large-scale legal action
- Corruption within the organization
Environmental investment can imply supporting industries with a positive environmental impact or, at the very least, ignoring those with a particularly negative impact.
This could imply investing in a business that uses eco-friendly technologies, like electric vehicles, or refusing to invest in businesses that generate excessive carbon emissions.
At a minimum, social investing entails looking for industries that promote policies like inclusion and social justice or ignoring companies with a negative track record in those areas.
For example, this could imply looking for businesses whose board membership is based on specific diversity standards. It may also imply avoiding organizations with a long history of discriminatory practices.
Governance investing is concerned with how a business is run. The core principle is that executive officers must be accountable to the company’s investors, employees, and the larger community.
How To Begin With ESG Investing
Creating an investment portfolio that is environmentally, socially, and governance-conscious does not have to be complicated. And, with more ESG investments available than ever before, you’ll have plenty of options to choose from. Here’s how to put together an ESG portfolio.
1) Decide whether to do it yourself or hire someone
When you want to build an ESG-style investment portfolio, you must first decide if you’re going to do it yourself by selecting specific ESG investments or hire a Robo-advisor to do it for you.
A. I’d like to make my ESG investments
If you can research a company’s sustainability initiatives or ensure that the companies in a fund align with your moral conscience, you might want to create your ESG portfolio. Here’s how to open a brokerage account if you need one.
Please remember that some brokerages offer screening tools to assist you in sorting through various ESG investments. You can proceed to the next step once you have a brokerage account.
B. I’d like assistance with ESG investing
It takes time to build an investment portfolio, especially if you’re looking for investments that adhere to a specific framework, such as ESG. Robo-advisers can help with this. They are digital advisors who create and handle investment portfolios depending on your risk tolerance and objectives.
They are significantly cheaper than in-person advisors. Robo-advisors are stepping into the ESG investments, frequently allowing investors to opt into a sustainable portfolio at no additional cost.
Just keep in mind to look into a potential Robo-methodology to ensure that the advisor uses both inclusionary and exclusionary filters that you are probably looking for.
2) Understand your ESG policies
ESG does have clear boundaries, especially when compared to “ethical investing” or “socially responsible investing,” but that doesn’t mean it perfectly aligns with your perceptions. Values differ from individual to individual, so take some time to identify your most important values and see if any of them fall beyond what “ESG” entails. Look for investments that share those values.
3) Identify your ESG investments
Once you have a brokerage account, you can begin building your portfolio and know which companies you want to empower with your money.
Checking out the latest reports of credible research firms can help you determine how a company or fund ranks on ESG investing factors and whether you should invest in them.
When creating your ESG portfolio, you’ll most likely include the two types of investments listed below.
You might want to buy individual stocks. Some businesses provide an impact report, which summarizes any sustainable or cultural initiatives they’ve implemented and how they handle problems like carbon emissions.
Check out a third-party site like Glassdoor to see how a company ranks for its work environment. You should also consider factors such as revenue and net income. Find out more about stock research.
ESG mutual funds
Funds can quickly fill gaps in your portfolio and diversify your holdings. In recent years, the number of ESG funds has increased dramatically. Some of these funds specialize in a specific issue, such as renewable technology, making it simple to tailor your portfolio’s impact area.
If your broker provides a mutual fund screening tool, you can compare various funds to see how their ESG ratings add up.
It would be best to read its prospectus to know more about a fund’s specifics, such as which companies it invests in. This document must be there on the official website of your online broker and will provide other information, such as the fund’s expense ratio.
Annual fees are expressed as a percentage of investment in expense ratios. A mutual fund calculator can help you figure out how much you’d pay to own a specific fund.
Investment Advisory Programs
An Investment Advisory Program is an account where instead of paying commissions for transactions you are paying a fee for advice. These programs come in several varieties depending on who you want to make trading decisions.
An Investment Advisory Program can be managed by the home office, by your Financial Advisor, or by you. In any case some of the large Financial Services Firms are starting to roll out ESG offerings in their Investment Advisory Programs. This is an upcoming area.
5 Popular ESG Funds in 2022
- Shelton Green Alpha Fund (NEXTX)
- Vanguard FTSE Social Index Fund (VFTAX)
- iShares MSCI USA ESG Select ETF (SUSA)
- Parnassus Core Equity Investor (PRBLX)
- Shelton Green Alpha Fund (NEXTX)
Many investors are becoming interested in sustainability. ESG investing allows investors to invest their money in companies that align to their values.
Author Bio: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.