ESG investing – what it is and how it can help investors make a positive impact in the world
Investors consider a number of different factors when evaluating different investment opportunities. This may include the level of risk associated with a particular asset, the potential returns or associated costs and fees. But many investors are now adding sustainability as a requirement before putting their money into any asset.
In recent years, investing in ESG has grown in popularity and companies are taking note. A report by MorningStar found that the number of open-ended and exchange-traded funds available to U.S. investors increased to 534 in 2021, up 36% from 2020.
Blaine Townsend, CIMA™, Executive Vice President and Head of the Sustainable, Responsible and Impact Investing Group at Bailard, Inc., said: “Investing in ESG is a process focused on risks long-term ignored by classical Wall Street analysis. investment management company in the Bay Area. “Think about it: climate change, scarcity of natural resources or a toxic management culture won’t allow a company to compete for the most talented workers.”
What is ESG investing in?
ESG stands for environmental, social and governance, and it is a type of investment strategy for those who want to put their money in sustainable stocks or mutual funds offered by working companies. to make a positive impact on the world and society around them. ESG factors consider a company’s impact on:
Environment: This can include a company’s energy efficiency, carbon footprint, waste management, etc.
Society: This element can focus on the company’s relationship with the community and society around them. Socially responsible companies can invest heavily in community projects or protect their customers’ data and privacy.
Administration: This factor considers how a company is managed, which may include company structure, executive compensation or diversity of board members.
ESG factors are not widespread, but common criteria include:
How are ESG scores calculated?
ESG ratings or ESG scores are calculated by third-party rating companies using their proprietary scoring methods. Analysts at these companies evaluate company disclosures, set up interviews with management, and review publicly available annual or sustainability reports to determine company’s ESG score.
Famous Rating companies include, but are not limited to:
- MSCI: Publish ESG ratings on 8,500 companies globally
- ISS ESG: Publishers rank over 11,800 issuers and 25,000 funds
- Sustainability analysis: Publish ESG ratings on over 13,000 companies
- Refinitiv: Calculate ESG scores across 11,800 companies
- FTSE Russell: Announcement of ratings on 7,200 securities
“Each vendor has its own algorithm for calculating these scores, often with a focus on materiality (the impact of a key performance indicator on the company), with adjustments for industry, scale and data are missing,” Townsend said.
It is important to note that not every investor makes decisions based solely on these ratings. Some investors will use their own methods to assess a company’s ESG score, or may even seek out a financial advisor who can perform their own analysis.
Advantages and disadvantages of ESG investment
Like any investment strategy, ESG investing comes with its own risks and rewards. Some of the key benefits and drawbacks include:
Professional: ESG Investment helps investors align their investment strategies with their values. While the ultimate goal of many investors may be to build lasting wealth, many investors are reluctant to do so at the expense of the environment or their community. Investing in ESG is a way for them to gauge which investments will not only give them a strong return on investment, but will also help them do some good in the process.
Con: “Greenwashing” can make it difficult to know which companies are truly sustainable. Many criminal companies use dishonest marketing tactics to convince consumers and potential investors that they are making a positive impact. Investors must do their homework, review public records, and determine for themselves whether the company is sustainable. This can be difficult because ratings vary widely between reporting companies. Research of MIT found that across six prominently ranked companies, there was only 61% correlation between their ESG data.
Conclusion: ESG funds can carry higher-than-average expense ratios. Based on Morningstar’s 2020 US Fund Fee StudyThe average expense ratio for ESG funds stands at 61% compared to 41% for traditional assets.
Expert: Close adherence to the ESG can be an indicator of a less risky investment. Companies with a strong commitment to diversity and equity even at the highest corporate level can reduce the risk of accidents or lawsuits that could negatively impact them and the wallets of developers. invest. “Investing in ESG is consistent with a long-term investment horizon,” says Townsend. “ESG can better position portfolios for the future [and] helps identify risks that may not be reflected in the next three months or years. “
How to make ESG investment
ESG investing can be a simple strategy that involves you (or your financial advisor) taking a closer look at your investments using an ESG-friendly lens to weed out investments that don’t generate returns. positive impact in these areas.
Here’s how you can get started:
1. Decide how you will build your portfolio:
You may choose to research and evaluate stocks or funds on your own, or you may decide to work with a financial advisor or robo advisor is the better way. An expert can point you in the direction of specific properties that meet ESG standards and align with your overall investment goals. Some robot advisors like Wealthfront and Betterment offer similar services, often at a lower cost.
2. Identify the criteria that are most important to you
Determine which causes are most important to you. Maybe you are looking to invest in a company that is working hard to reduce their carbon footprint, or you want to support a company that prides itself on gender diversity. Knowing what’s important to you can help you narrow down your list of investment options.
3. Deal with investments that fit your goals
Once you’ve identified factors that better align with your goals and values, you can open a brokerage account and decide how much you want to invest and in what specific assets. Many online brokerage accounts allow you to filter your investment options by sector, sustainability, and financial performance on these investments.
For investors looking to make a positive impact, ESG investing can be an additional filter when building their portfolio. “ESG is a process, not a panacea,” says Townsend. “Other attractive investments can fit into any strategy that incorporates ESG characteristics.”
