What Is ESG Investing?

Feb. 7

(Five-minute read time)

Have you heard about ESG investing but aren't quite sure what it means? It's a term that's gaining a lot of buzz in the financial world, standing for Environmental, Social, and Governance investing. Also known as sustainable investing or socially responsible investing, this approach involves carefully choosing companies to invest in based on their positive impact on the world, including how they handle environmental issues, social responsibilities, and internal governance.

As we all become more conscious of issues like climate change, social justice, and ethical business practices, ESG investing is reshaping the future of finance. In this article, we'll unpack what ESG investing is all about, explore whether it's a good fit for your investment goals, discuss how it can potentially boost your portfolio, and how to start your journey in ESG investing.

Environmental, Social, and Governance

Making sure your investments are sustainable lets you truly be a part of what many consider to be the second industrial revolution, the “greenifying” of development. Currently representing 36% of all managed assets across the U.S., Canada, Japan, Australasia, and Europe, this sector has seen a staggering 15% growth over the past two years, a time when other sectors have fallen considerably.

What does it mean for a company to be socially responsible and in line with ESG values?

An environmentally conscious company considers the potential environmental impacts of all that they do, and whose actions demonstrate care for the care and protection of the environment. They are compliant with environmental regulations and have policies in place to dictate sustainable and ethical practices regarding environmental concerns, such as:

Climate
Energy use
Waste
Natural resource conservation
Treatment of animals
Protection of biodiversity
Greenhouse gas emissions (direct and indirect)
Pollution

When it comes to social responsibility, it’s important to consider who a company chooses to interact with, and how they interact. Take a look at the company’s relationships with internal and external stakeholders. Does the company hold its suppliers to its own ESG standards? Do they donate any part of their profits to local communities, or encourage employees to volunteer in the community? Do their workplace conditions prioritize health and safety, and do they treat their employees and customers ethically? Are their actions in line with diversity, equity, and inclusion initiatives?

Governance refers to how the company is governed and whether they act ethically in that regard. Do they use accurate and transparent accounting methods? Do they consider integrity and diversity when selecting those for leadership positions? Do they hold their shareholders accountable? On the flip side, do they use political contributions to gain preferential treatment? Do they engage in any illegal conduct?

Is ESG Investing Right for You?

To understand whether ESG investing is right for you, you must first determine where your values lie and how you want those values to be reflected within your investment portfolio. ESG investing is a way for you to support the causes that are important to you by supporting companies that share your values. Supporting ESG-compliant companies also encourages companies to adopt ESG practices as more and more investors take on an ESG mindset, which means ESG investing has an impact that goes much further than most investors first imagine.

For many of us, making the change to an environmentally aware investment portfolio allows us to finally align our own values and awareness for the need to change with our need to care for ourselves financially. It can be a truly transformative experience, much bigger even than buying your first Electric Vehicle or making the decision to support your local organic market.

Not only does ESG investing allow you to introduce your values and ethics into your investment decisions, but it can also have some substantial benefits for the performance of your portfolio. Here are a few ways that ESG investments may boost your portfolio’s performance:

Boost Your Portfolio Performance with ESG Investments

ESG investing tends to attract the long view investors. It places environmental stewardship as a guidepost from which we make investment decisions and it lets us all know that we will be leaving the earth a little bit better than how we found it thanks to the financial decisions we made along the way.

A company’s ESG status speaks to the quality of their management. If a company is well-governed and adept at managing its exposure to social and environmental risks, the company is likely well-managed overall. It’s no surprise, then, that ESG investments tend to outperform the general market. A report conducted by Oxford University and Arabesque Asset Management in 2015 reviewed over 200 sources on ESG management and found that in 88% of the research, “robust sustainability practices [demonstrated] better operational performance, which ultimately translates into cash flows.” It also states that 80% of the studies reviewed show that “prudent sustainability practices have a positive influence on investment performance.”

Companies with high ESG ratings are historically profitable, producing stable earnings and paying high dividend yields. This is in part because those companies with stronger ESG characteristics are linked to a range of more effective business practices, including talent acquisition and innovation. ESG leaders tend to focus on sustainable success, which translates to an emphasis on attracting the best talent for their workforce and maintaining access to critical raw materials.

Investing in ESG leaders is a great way to mitigate risk. ESG companies tend towards transparency and are less likely to face incidents of bribery, corruption, fraud, labour strikes, and accounting irregularities. As a result, ESG-compliant companies have less negative press. This translates to a positive impact for investors who can avoid the blowups that follow when an unethical company is exposed for their questionable practices.

How to Get Involved with ESG Investing

If you want to pursue ESG investing, begin by considering your values and creating your own criteria for what you consider to be ethical business practices.

For instance, you might decide to only invest in companies who publish a sustainability report, or who have made a pledge to reduce their carbon footprint. You could choose to focus on companies that use ethical supply chains and pay a living wage, or those who operate with a diverse board of directors.

There are many, many factors to be considered when looking at companies for ESG investing. If you’re interested in investing environmentally responsible companies, good corporate citizens, and led by accountable managers, speaking with a financial advisor regarding your goals and priorities is the best way forward. This will help you to distinguish which companies are authentic in their ethical practices, and how to leverage ESG investment tactics to improve the overall performance of your investment portfolio.

For more information regarding ESG investing or to get started on your ESG investing journey, book a call to discuss with the experts at WealthTrack today.

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