Updated: Mar 10, 2021
There are a lot of reasons to select ESG (Environmentally, Socially, and Governmentally responsible) investments! If you’re reading this you’re probably already familiar with what ESG investing is (if not, read our article here). However, you may not be familiar with some of the benefits and risks of ESG investing.
First, the obvious reason: ESG portfolios provide you the peace of mind that comes with knowing your money is aligned with your beliefs. This is the biggest motivator for most investors that choose this kind of portfolio.
What you may not know, though, is that you don’t have to give anything up. The common belief was that by excluding companies on ESG grounds (like tobacco companies, logging companies, and oil producers, for example) you were cutting yourself off from valuable sources of income and growth, and maybe creating instability in your portfolio. The most recent data have shown us that that’s not true*.
As well, up until recently, it was assumed that you’d pay more for an ESG-friendly fund than for one that didn’t make those considerations. While it’s true that you can’t get an ESG fund for the incredibly low management fees of a S&P 500 index fund, it’s no longer the case that these will cost you a ton in expenses. As more and more investors have gravitated to these funds the costs have come down, and they’ll only get more competitive.
So that’s why it won’t hurt to invest in a responsible way. But what benefits could you get from it above and beyond a non-ESG portfolio?
Well, each of the acronym’s terms (Environmental, Social, Governance) also points to a kind of risk. By investing with those risks in mind you’re minimizing the likelihood of future harm to your finances while still reaping the benefits of smart investing.
Environmental risks are at the forefront of our minds right now. Climate change is undeniably getting worse. Natural resources worldwide are being exhausted at an unsustainable rate. There are a bevy of effects of pollution that we’ll begin to see in the coming years, but that we aren’t even aware of and can’t address yet. With that in mind, companies with strong environmental bona fides are helping to minimize the ongoing financial effects of hurricanes and unpredictable weather, of species die-offs and dwindling natural resources, of potentially enormous ecologically-based lawsuits.
The risks a company mitigates with good social practices are even more diverse and difficult to predict. Employee lawsuits, major recalls, supply line interruptions and collapses, and PR disasters are among these dangers but certainly not all. By choosing companies with proven reputations in this metric you’re reducing the risk to your portfolio of these varied issues affecting your growth and income.
Finally, when you consider the risks posed by poor governance, you’re really considering the risks of poor leadership. Whether it’s from a PR perspective (how many times this year have you heard of a corporate board coming under fire for being 100% straight white men over 60?), from a regulatory perspective (banks alone paid nearly $10 billion in fines in the 15 months ending 2019 – and are on track for more**), or from a leadership perspective, the risks of bad governance can send a company’s value plummeting in the space of one headline.
So now we know: it doesn’t cost you to invest in line with your principles, and doing so could even protect your portfolio from some common risks that will only become more common over time. If that speaks to you, it’s time to find out more about how you can take that step.
* The IMF’s Oct 2019 Global Financial Stability Report
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.