You may have already heard of ESG investing, which stands for environmental, social, and governance investing.
Have you ever considered that your portfolio could look even better because you invest in something you have a passion for? I know that I always work harder on things I love, and I'm guessing you do, too. Whether you invest based on a company's leadership style, greenhouse gas emissions status or even human rights, that may propel your investments.
When you wholeheartedly believe in something and throw all your energy into it, amazing things happen. It's the same with investing.
What is ESG Investing?
First of all, let's make sure we're all on the same page. ESG, also referred to as socially responsible investing (SRI) and sustainable investing, involves a set of scores that weigh environmental, social, and governance factors.
Environmental: As you might imagine, environmental factors focus on how a company minimizes its impact on climate change through greenhouse gas emissions, waste management, and energy efficiency, whether it uses sustainable products and how it uses natural resources.
Social: Social factors involve how well a company manages social trends, labor, and politics. This may involve community development, diversity, equal opportunity employment, human rights, and more.
Governance: Governance considers leadership, including executive pay, audits, internal controls, and shareholder rights. It also considers the diversity of a company’s board of directors and the company's responsiveness to shareholders.
Reasons ESG Investing Can Help You Flourish
ESG investing may motivate you far beyond regular investments. Here's how they can help you:
Reason 1: You have a passion for it.
When you buy shares of any old stock, you probably look at the company's earnings growth, stability, industry strength, price to earnings ratio, management, and dividends.
That's not saying you won't do the same thing for an ESG investment. However, having a passion for a particular ESG stock might mean you get excited about researching it because you get excited about the possibilities.
You might even do more research than normal because you want to pick the companies that have the "best" ESG qualities to add to your portfolio. Many people don't do enough research before they invest, so this kind of research might be something you can get excited about.
Reason 2: You're more likely to monitor your investments.
Have you ever invested in something, then promptly forgot about it a week later? Choosing an ESG stock could help you remember. (Because you're more passionate about it!)
You may find yourself more willing to keep yourself updated about the company's latest news, analyzing the company's quarterly results, corporate announcements, changes in the shareholding pattern and more.
Reason 3: You could tap into high returns.
In the first year of the pandemic, large funds with environmental, social, and governance criteria outperformed the broader market, according to a report published by S&P Global. S&P analyzed exchange-traded funds and mutual funds with more than $250 million in assets under management.
The SPDR S&P 500 Fossil Fuel Reserves Free ETF, for example, performed the same as the broader S&P 500.
Plus, more passive funds have become available instead of the common actively managed ESG funds.
Reason 4: You can take advantage of more choices than ever.
You could say that ESG investing has gone mainstream, thanks to better information and increased investor interest. Sustainable funds available to U.S. investors grew to almost 400 last year. This was nearly a fourfold increase over the last decade, according to Morningstar.
Now, investors in the United States can tap into more than 600 ESG funds and ETFs (exchange-traded funds), which represents $161 billion in assets under management, according to Morningstar.
The Biden administration may make it easier to allow businesses to offer sustainable funds to employees through their 401(k) and other retirement plans.
Reason 5: You may potentially lower your risk.
Companies that fail to manage their ESG risks often hurt the value of their stocks. Consumers and investors continue to demand high attention to ESG practices.
Morgan Stanley ran a study that analyzed the risk and return of sustainable funds. It found that sustainable funds consistently show a significantly lower downside risk for investors, regardless of the asset class held.
How to Get Started ESG Investing
Do you want to manage your ESG investments on your own or would you like help? Whether you want to take the DIY approach or get an advisor, choose one option first.
DIY investing: You can do in-depth research on companies for an ESG portfolio. DIY investing gives you a great way to save on fees and offers some independence to make your own investing decisions. It may take more time and the learning curve may throw you a few curveballs while you're at it. After all, passive investments that track market benchmarks perform just as well or even better than most actively managed funds. Find a brokerage and invest in the funds that you want in your portfolio.
Get an advisor: You can choose between a robo-advisor or a real, human financial advisor to help you. Robo-advisors are digital advisors that build and manage investment portfolios based on your risk tolerance and goals. They will cost less than a human advisor, but you may choose a real person to help you to make sure you get a human touch. If you choose the robo-advisor route, you'll still have to choose the right one for you.
Get a Jump Start on ESG: You Might Find Lots of Success!
ESG investing isn't just about values — it's about long-term risk management that affects all investors. Furthermore, more and more investors have realized that their investment objectives and personal values aren't mutually exclusive.
As ESG continues to gain in popularity, you might find a friend or two who finds it as motivating as you do. As you know, it's satisfying to donate to causes you believe in. Why not make some money at the same time?
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