Responsible investing, also known as ESG (Environmental, Social, and Governance) Investing, is a socially conscious way to align your financial goals with your non-financial goals. With ESG investing, individuals and asset managers choose to invest in companies that act in a socially responsible way. This includes buying the shares of companies whose values align with yours, and selling or avoiding the shares of companies that do not
ESG considerations include:
Environmental Factors: climate change, waste reduction, deforestation, and air and water pollution among others.
Social Factors: data protection and privacy, human rights, how they treat their employees, customers, and the communities that they operate in.
Governance Factors: bribery and corruption, how a company appoints their board of directors and audit committees, as well as executive compensation, political contributions, and lobbying.When an individual or asset manager reviews a company to assess its potential for profitability and long-term growth, they focus most of their attention on the company’s financial statements and manager commentary. If socially responsible investing is an objective, an additional step can be taken to examine the environmental, social and governance issues surrounding the company. This ESG filter may result in companies being passed over so in response, some companies now release “sustainability reports” that highlight these factors and invite stakeholders to consider them when evaluating their companies.
Don’t be fooled
Allocating investments to companies that reflect your values and beliefs can be empowering but as companies realize that ‘going green’ attracts investor money, many have been accused of greenwashing. Greenwashing is when a company makes claims about being environmentally friendly, when they haven’t made any notable sustainability efforts.
Another consideration when deciding to include investments based on their ESG reputation is how well it fits into your current portfolio and whether it allows you to achieve your long-term financial goals. Some investments with high ESG scores may not offer diversification benefits to your existing portfolio and could reduce your expected rate of return. These trade-offs will need to be reviewed to determine if ESG investing is right for you.
