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Everyone has a different approach to investing. Some people take a high risk/high reward approach to their investments, others prefer to build their nest egg slowly over time, and some people see investing as an opportunity to vote with their dollars. ESGs are attractive to folks who enjoy using their money to effect change.
ESG is an acronym for environmental, social, and governance. In ESG investing, investments are evaluated based on environmental, social, and governance factors in tandem with their potential for return. In short, the objective is to do good while making good returns.
Environmental. The environmental factors are mostly concerned with how the company mitigates its environmental impact and overall sustainability. You’ll need to research its climate change policies, emissions, carbon footprint, any use of renewable energy, etc. Reports such as the Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI) can help you evaluate these concerns.
Social. This is the part where you evaluate how the company treats the people it deals with; both inside and outside of the company. You’ll want to know its hiring practices, stance on human rights issues, and any community development efforts it’s making.
Governance. Corporate governance refers to the company’s hierarchical structure and how decisions are made. You’ll analyze company oversight, the diversity of its board of directors, the compensation executives receive, and how transparently it communicates with its shareholders.
Contrary to misconceptions that sustainable investments are less profitable, a study by Morgan Stanley showed that sustainable funds actually outperformed traditional, non-ESG funds in 2020 by providing higher returns. The sustainable investments also proved to be less risky. The study pointed out that the 2020 data was consistent with their findings from 2019 as well.
Even ESG investments have risk, so don’t let the data fool you into thinking they’re exempt from risk. They are not. As is true of all investments: due diligence is critical.
The first step of investing in ESGs is finding an investment. Some people opt to do the research themselves, find their own investments, and build out an ESG portfolio on their own steam. Others may want to consult with an ESG investment advisor or brokerage and allow them to develop an ESG portfolio for them. Both are valid strategies for increasing the sustainability of your investment portfolio.
Want to learn more about sustainable investments? Watch our webinar: Making the Business Case for Renewable Energy Investments.