For many individuals, the importance of investing in order to achieve aspirations and secure financial stability is well-known. When initiating an investment account, concerns about the rate of return, fees, and tax implications are common as these are key factors impacting portfolio balances. Often, the thought of examining the societal or environmental impact of investments may not even cross one’s mind.
Environmental, social, and governance (ESG) investing is a method that addresses this issue. ESG stocks and index funds utilize specific criteria to steer investors towards companies that are actively contributing to positive change in the world. While it is encouraging to see investment strategies now incorporating significant initiatives such as environmental and social impacts through ESG initiatives, understanding these funds can still present a challenge for those unfamiliar with them.
Understanding ESG investing
ESG investing involves the use of non-financial data to assess the sustainability of a company or investment as well as its societal impact. Companies that adhere to ESG criteria may operate in various sectors such as healthcare, technology, manufacturing, or banking, but they are dedicated to advancing environmental or social causes and follow established frameworks to do so.
An organization’s environmental policies may concentrate on issues like carbon emissions from production, water or air pollution, waste disposal, or water consumption. Social considerations may highlight aspects such as gender and diversity in hiring, data security, policies addressing sexual harassment, human rights, and equitable labor practices.
Governance may seem abstract, but typically focuses on board and leadership diversity, transparency in political contributions, lobbying activities, or addressing internal corruption and legal disputes.
Frameworks and criteria for ESG
While organizations may employ an ESG framework to evaluate their business choices, there is no definitive guide to determine sustainability. Companies can select from various ESG frameworks developed by non-profit organizations or government bodies worldwide, each with distinct methodologies, indicators, and scoring mechanisms. Companies may even utilize multiple frameworks to assess their initiatives, depending on the nature of their programs—for instance, a combination of environmental and social policies.
All this criteria and various choices can be overwhelming. According to the ESG investing newsletter, For What It’s Worth (FWIW), a good approach to commencing an ESG investing journey is to become familiar with the names and acronyms of some of the most prominent or widely-used frameworks companies employ to evaluate themselves and others.
While there is an abundance of specialized terminology and acronyms to grasp when delving into these investments, understanding the major frameworks and how a company rates in each can assist in evaluating your investment options and gauging a company’s performance on crucial issues.
Selecting an ESG fund
The ESG investing approach has gained significant popularity in recent years, leading to a variety of choices offered by major brokerage firms.
Identify the suitable firm
After reviewing some of the frameworks in use and identifying companies you wish to invest in, begin exploring available funds and the rules and fees associated with brokerage accounts to locate ESG stocks that suit your preferences.
Many brokerage firms provide ESG funds, including Vanguard and Charles Schwab, and investing can be as simple as adding the fund to your existing brokerage account and selecting an investment amount. Some Robo-advisors, like Betterment or Wealthfront, also offer investment funds aligned with ESG values or focusing on societal issues like diversity and gender equality. This can be a suitable option if you prefer a ‘set and forget’ approach to managing your investment portfolio.
Define your ESG standards
While exploring ESG funds, take the time to identify the essential criteria you seek in a company and create a list to help expedite the evaluation process when considering potential investments. Paying attention to social considerations is crucial, but it is equally important to aim for a reasonable return on investment.
You are unlikely (and probably shouldn’t) replace your entire portfolio with ESG investments, but establishing the criteria you are searching for can aid in evaluating other investment prospects from a refined perspective.
Develop your ESG portfolio
After exploring your options and setting up a brokerage account, you can begin investing in companies that resonate with your values. In addition to the aforementioned frameworks, make sure to review the company prospectus and any independent evaluations of the company using platforms like Morningstar to comprehend its business structure and potential return on investment.
Before submitting your purchase request, consider applicable fund fees. While some funds may carry higher fees for ESG investments, finding a fund with a good return and lower fees is still achievable. Compare the available options and select the fund that aligns best with your requirements.
Closing remarks
ESG investing may be a novel concept for many, but it is likely that we have been engaging in it unconsciously for years. Whenever a decision was made to support a Black-owned business, choose a local small business over a large corporation, or cease using a product or divest from a company due to unethical behavior, it was a form of social investing.
As with any investment, conducting thorough research is essential. The opportunity to invest in companies that mirror your values has been long-awaited and will hopefully endure well into the future.
