Illustration by Magda Azab
While the concept of impact investing might not be new to you, the term ESG (environmental, social, governance) and the ways in which it’s measured might be. ESG investing is a strategy where you only invest in companies that commit to a set of sustainable activities towards the environment, people and the community.
What's even more amazing, is that ESG funds have been the highest performing in the market and have shown lower volatility than funds that invest in polluting industries. A report found that 19 out of 26 ESG exchange-traded funds have grown between 27.3% and 55%, while the S&P 500 rose by 27.1%.
In this article, you’ll find out what ESG means, whether they really match your values and how you can start investing in ESG stocks.
Environmental, social, and (corporate) governance are the three criteria to evaluate a company’s sustainability performance.
The environmental component measures the company’s impact on the planet. Examples include:
The social component addresses issues regarding people. For example:
The governance component relates to board independence, leadership effectiveness, and business ethics. Some topics include:
ESG criteria and ratings can differ from company to company, so there isn’t one universal standard or approach to ESG investing. If you want to be more intentional with your investments, you’ll have to make use of various available data like company reporting, investor analysis, and investor reporting to make the right decisions.
Companies committed to ESG initiatives have to publish measurable goals and their progress against those goals, in periodic sustainability reports. Reliable reports are those that follow ESG standards established by the Global Reporting Initiative (GRI) and/or the United Nations Principles for Responsible Investment (PRI).
Companies might claim to be more ethical than they actually are.
ESG is still a new concept and it’s lacking in both standardisation and regulation and most corporate activities are self-reported. Hence, there can be inconsistencies in ESG portfolios and funds. This is where greenwashing occurs. You might be surprised to find some businesses, like oil, or even tobacco companies, included in ESG funds. With the rise of interest in sustainability, it can easily become just a trend that companies try to capitalise on. According to a recent study, nearly half (44%) of investors list greenwashed investments as their biggest concern.
However, with proper research and approach, you totally can avoid greenwashing and ensure your investments make a difference.
Developing your own ESG portfolio can take a lot of time. If you can’t do extensive ESG research on your own, there are a few options: 1) ESG mutual funds and ETFs; 2) ESG portfolios created by digital advisors, aka robo-advisors; and 3) investing in companies that make direct investments in impact companies. The key point is to make sure you understand their values and methodology so you can agree with how certain investments are included or excluded from the portfolio, and rest assured that your investments really promote a healthy change.
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