What is ESG Investing?
Updated: Feb 17
You may have heard this term when researching investments, but might not be familiar with it – it’s still a pretty new term. The concept, however, has been around for a while. You may have heard terms like socially responsible investing, or sustainable investing. These are all similar concepts that are also covered by, or preceded, ESG investing.
ESG stands for Environmental, Social, and Governance, and the term encompasses an investing philosophy that prioritizes investments that benefit our planet and our society (or, let’s be honest, at least minimize the damage).
The primary benefit of ESG investing is that you can invest to secure your future in a way that aligns with your personal beliefs. If this resonates with you, it’s time to investigate ESG investing.
Environmental: If you’ve heard of any company ‘going green,’ you’ve seen the effects of companies attempting to reduce or mitigate their environmental impact. This is the first concern for many investors: what kind of impact are my portfolio’s holdings having on the world? In many ways this metric is easy to understand. How much CO2 does a company’s operations produce? How much pollution? How much waste, and how much recycling?
However, a lot of companies bear additional scrutiny. Some have distributors or suppliers that have worse metrics than the end company. Some depend on environmentally detrimental practices that are undertaken not by the company, but by governments or people on behalf of the company, and thus their environmental metrics are misleading. It’s difficult, but worthwhile, to understand the environmental impact of the individual companies in which you invest.
By investing in alignment with your beliefs you can reduce the effects of pollution, climate change, and over-use of natural resources.
Social: The social aspect of ESG investing refers to the social effects of a particular company, especially among its workforce, customers, and the communities in which it operates. Are employees compensated fairly, and drawn from diverse backgrounds? Are there potential or real human-rights concerns anywhere in the supply chain? Do communities thrive when this company moves in, or experience decline? Does this company stand by its product, pursue a worthwhile mission, and deliver for its customers?
Just as in evaluating the ecological effects a company has it can be difficult to evaluate the social effects of a given company. To further complicate matters, the importance of different social elements can be weighted radically differently by different money managers – or by you, the investor. A good ESG portfolio gives some weight to each factor in a way that addresses the most pressing issues while maintaining a balanced investment profile.
When you invest in companies with a strong social record you’re indirectly supporting the communities that company sources from, the communities it sells to, and the communities it operates in – that’s a lot of impact.
Governance: When we talk about the governance practices of a company we’re talking about the leadership. Who makes up the leadership of the company? Are they diverse? Compensated appropriately? Is the board independent from the management? What about taxes and regulations? Is this company paying its fair share, and keeping a clean record for all auditors and regulatory bodies?
The merits of investing in a company with good governance practices is harder to quantify than environmental or social metrics. What you get from investing with governance in mind is knowing that your investments will give you a voice in that company, and that it will stay on the straight & narrow path when it comes to regulatory responsibilities. In most cases you’ll also know that your investment helps reduce the effects of severe income and wealth inequality – a matter more pressing today than ever before.
Fundamentally ESG investing is another avenue by which you can provide support to those causes that are most important to you.
This series of topical articles is intended to provide general information. For more details on the subject, or to find out how these securities and strategies fit into your plan, reach out to one of our financial advisors.