What does ESG mean?
ESG investing stands for Environment, Social, and Governance. These are three broad criteria used to analyze stocks to help you create a more ethical portfolio.
Why should I care about ESG Investing?
In the past, we were forced to choose between investment performance, or investing with a clear conscience. However, according to a 2019 Morgan Stanley study, there is no financial trade-off in the performance of sustainable funds compared to traditional funds.
Thanks to technology and an increasing interest in ESG, sustainable investing has become more accessible to anyone who understands the value of the stock market but doesn’t want their money to go to companies with unethical practices or products.
And, with the growing popularity of ESG, companies are encouraged to employ more ethical policies because they know these are increasingly important to their investors and the general public.
Essentially, ESG investing lets you “vote with your money.”
The E in ESG – Environmental
This component of ESG depends on a company’s impact on the environment – obviously – and whether it takes measures to reduce its carbon footprint or promote sustainable practices.
The key to remember with Environmental - ESG companies is that they don’t necessarily have to be companies that produce “green” energy or eliminate pollutants, they can be companies that make efforts to ensure they don’t deplete earth’s natural resources or limit their carbon emissions. In other words, if ACME Company manufactures dog beds, as long as their supply chain is sustainable and they actively work to reduce their carbon footprint, they fit the bill for ESG.
Other Environmental factors worth examining include:
- Does the company use or create wind, solar, or other renewable resources?
- Does it recycle and safely dispose of waste and hazardous materials?
- Are its suppliers fair trade?
- Does the company advocate and promote climate change policies?
- Does it preserve the biodiversity of the land it owns?
These are just a handful of factors used to determine a company’s environmental stance and if they qualify for ESG treatment.
How can I invest in ESG companies?
There are three main ways to invest sustainably and ethically:
1. The first way is to do your own research and establish your own consistent environmental priorities for companies you want to invest in. Once you’ve created your own metrics, there are several online platforms that allow you to buy stock in those companies.
Essentially, you’re creating a do-it-yourself portfolio with stock you’ve specifically chosen based on your specific environmental values.
One downside of this route is that you have to do thorough research for each company you want to invest in. The other important thing to remember is that buying individual stocks is considered risky because you’re increasing your exposure to a select few companies, therefore, decreasing your portfolio’s diversification.
For example, let’s assume you purchase stock from ACME Company because they’re a carbon-negative company. They sound like a good investment and a great company, but if all your money is tied up in their stock and they suddenly go out of business, that’s your money down the toilet.
2. The second way to create an ESG portfolio is to invest in mutual funds or ETFs – exchange-traded funds - that specialize in ESG. These are typically investment companies that have done the research for you and created their own criteria to determine if a company meets their standards of ESG.
This way you’re investing in a pool of stocks that meet ESG standards. This takes the work out of researching specific companies and also improves your portfolio diversification. The downside is that you still have to research which ETFs and mutual funds meet your standards of ethics and sustainability, and navigating investment websites can be mind-boggling.
Another downside is that many of the big investment companies only after a small range of ESG investments, often using a “take it or leave it” approach. So if your main interest is the environmental aspect of ESG, you might have to settle for a broader ESG portfolio even if you don’t really care about the Social or Governance aspects.
3. The third way is to create a financial plan with an advisor that includes your specific life goals and your customized ESG portfolio. This means telling your advisor what matters to you, so they select and create the portfolio that’s right for you. We can screen investments based on your priorities to filter out companies you do and don’t want your money going toward.
After you have your financial plan in place, we help monitor your goals’ progress and make sure you’re choosing the right investments to help you achieve them.
How do I get started with ESG?
With the rise in popularity of socially conscious investments, ESG ETFs and mutual funds are much more accessible, but building an investment portfolio on your own can be daunting.
At Meyer Wealth Advisors we specialize in creating customized financial plans – that includes creating an SRI portfolio that’s tailored to your values. Schedule a call below or email us at firstname.lastname@example.org to learn how we can create your customized SRI portfolio.