ESG stands for the Environmental, Social, and Governance
ESG investing entails researching and factoring in environmental, social, and governance issues, in addition to the usual financials, when evaluating potential stocks for your portfolio.
These kinds of investments seek to generate positive returns, sure, but also to have a long-term impact on society, the environment, and the mission of the business itself.
ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing
How Environmental, Social, and Governance (ESG) Criteria Work
E is for environmental
The environmental component requires research into a variety of elements that illustrate a company’s impact on the Earth, in both positive and negative ways. A company that’s an actively good steward for the environment might be deserving of your dollars.
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.
S is for social
The social component consists of people-related elements like company culture and issues that impact employees, customers, consumers, and suppliers — both within the company and in greater society.
Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?
G is for corporate governance
The corporate governance component relates to the board of directors and company oversight, as well as shareholder-friendly versus management-centric attitude. In less dry terms, ESG investors analyze how corporate managements and boards relate to different stakeholders, how the business is run, and whether the corporate incentives align with the business’s success.
With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.
Why choose ESG investments?
Socially conscious investors practice ESG investing not only for moral or environmental reasons but also because they believe that rewarding these kinds of values will support a company’s long-term performance. They’re investing in sustainability itself. And it’s a risk management move. To them, investing significantly in a company with notoriously unsafe workplace practices or a history of oil spills is an inherently fraught investment and won’t pay off in the end.
Pros of ESG Investing
Feeling good about your choices
When you buy organic tomatoes at the farmer’s market as opposed to the watery, pale-red spheres you get at your corner supermarket, on a very basic level, there’s a personal satisfaction in that choice. In and of itself, that’s a positive return. When you invest in a company that successfully uses clean energy or has a great workplace environment, you’re simultaneously investing in your values.
If you plan to engage in ESG investing you’ll have to do research into how the money you invest will be used. For the most part, the process is simple. It’s much like dating: You have to screen your candidates for qualities you find attractive and be on the lookout for red flags. Alternatively, you could choose a predefined portfolio that is socially responsible and ESG friendly. This way, you can save time on research and rest easy knowing your money is being used sustainably.
Supporting companies that share your values (and weeding out those that don’t)
So-called negative screens (the red flags) look out for issues such as corruption, a bad environmental track record, or past workers’ rights abuses. These companies are disqualified as potential investments because they don’t reflect ESG values. By avoiding them and instead investing in accordance with ESG principles, it means that you’re: a) putting your money where your mouth is, and b) rewarding companies that practice the values that are important to you.
Your portfolio doesn’t need a lot of constant attention
Another benefit to ESG investing is that its built-in consistency means that once you’ve set up your portfolios with companies that practice your values, you can pretty much leave the portfolio be —unless one of the companies you’re investing in has suddenly been discovered strangling dolphins or something. But for the most part, investing according to core values means you don’t have to keep checking in on your investments so frequently, and can focus on other aspects of your life.
ESG vs Socially Responsible Investing (SRI)
While it may seem that ESG investing and socially responsible investing are the same thing, the difference is that SRIs tend to be driven by a set of values usually guided by religious or certain societal principles, whereas ESG investments tend to be driven by more generalized moral values. If you’re interested in SRIs, you’re probably going to screen companies that are involved in tobacco or alcohol or pornographic products. ESG factors, on the other hand, are a bit broader and tend to refer more to guidelines that protect human rights and the environment. Nonetheless, most investors use the terms interchangeably.
How to start investing in ESG?
For Canadian wanting to start low cost investing on ESG, I personally use WealthSimple Roboadvisor and Questrade Questwealth. Please contact me if you have any question, please click contact or visit https://www.facebook.com/wealthacker/