Why You Should Care About ESG Investing (And How to Do It Right)

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Contributor, Benzinga
October 22, 2024

As more investors look to make a positive impact with their money, ESG investing has gained significant traction. This type of investing allows you to align your portfolio with your values while aiming for solid financial returns. But why should you care about ESG investing and how can you ensure you're doing it right?

What Is ESG Investing?

ESG investing stands for environmental, social and governance investing. It involves putting your money into companies that meet specific criteria in these three areas. Environmental factors might include reducing carbon emissions or water management practices. Social factors focus on how a company treats its employees, customers and communities, while governance looks at leadership, ethics and shareholder rights.

Examples of ESG investing include purchasing shares in companies prioritizing renewable energy, having strong diversity and inclusion practices or demonstrating transparency in their corporate governance. These companies strive to make a positive impact on society and the environment.

How Does ESG Investing Work?

ESG investing is not just about picking companies that do good. It involves evaluating businesses based on their adherence to ESG principles. Investors use ESG criteria to screen companies and decide whether they align with their financial goals and ethical values. Some investors will exclude companies performing poorly on ESG metrics, while others may focus on businesses making strides in sustainability or social justice.

Many investment firms have developed ESG-specific funds and ETFs, focusing solely on companies meeting ESG standards. These funds allow investors to diversify while keeping their investments aligned with ESG goals. ESG investors also monitor ratings and indexes that track companies’ performance in these areas, making it easier to select stocks and funds that fit their strategy.

Why Should You Care About ESG Investing? 

As investors increasingly focus on their money's impact on the world, ESG investing offers a unique opportunity to align financial goals with personal values. 

Align Investments With Personal Values

One of the main reasons to care about ESG investing is that it allows you to align your investments with your values. If you're concerned about climate change, human rights or corporate ethics, you can invest in companies prioritizing those concerns. This makes your portfolio a reflection of what matters most to you. Investing in companies that share your values can make you feel more connected to your financial decisions, knowing you're supporting businesses that aim to create positive change.

Potential for Competitive Financial Returns

Contrary to the belief that ethical investing sacrifices profits, ESG investing has the potential for competitive financial returns. Many ESG-focused companies are leaders in innovation and sustainability, which can translate into financial growth. By addressing risks associated with climate change, social instability or governance issues, these companies may be better positioned to perform well over the long term. Studies have shown that companies with strong ESG practices can outperform those without them, making it possible to invest with a purpose without sacrificing returns.

Reduce Exposure to Environmental and Social Risks

ESG investing can help reduce your exposure to environmental and social risks that could negatively impact a company’s performance. For example, companies that rely on fossil fuels or operate in industries with poor labor practices may face regulatory challenges or reputational damage. ESG investing encourages you to avoid these risks by focusing on businesses proactively addressing environmental and social concerns, which can lead to a more resilient portfolio.

Support Companies Making Positive Impacts

By participating in ESG investing, you actively support companies striving to make positive impacts in the world. Whether through sustainable business practices, fair labor policies or ethical leadership, your investments help these businesses continue their work. The more investors support ESG initiatives, the more these companies can grow and lead by example, promoting widespread change across industries.

Encourage Corporate Responsibility and Sustainability

ESG investing encourages companies to act more responsibly by showing that there is demand for sustainable and ethical business practices. Investors who prioritize ESG factors send a clear message to businesses that these issues matter. This pushes companies to adopt better practices, not just to attract investors but to stay competitive. As more companies commit to ESG principles, it fosters a business environment that values sustainability and corporate responsibility.

Diversify Investment Portfolio

ESG investing also helps with portfolio diversification. Many ESG-focused funds and companies operate in various industries, from renewable energy to technology. This diversification can balance your portfolio and protect you against sector-specific risks. Investing in ESG can expose you to high-growth sectors, such as clean energy, that are positioned for long-term success.

How to Do ESG Investing Right

Now that you understand why ESG investing matters, it’s important to know how to approach it effectively.

Understand ESG Criteria

To invest in ESG correctly, it’s important to understand the criteria that define a company’s ESG performance. Each investor may prioritize different aspects of ESG, so decide which factors matter most to you: environmental sustainability, social responsibility or corporate governance.

Research Companies Thoroughly

Don’t just rely on ESG labels – research companies thoroughly to ensure they align with your values. Look into their business practices, annual reports and sustainability initiatives. The more you know about a company, the better you can decide whether it deserves a place in your portfolio.

Use Reputable ESG Ratings and Indices

Reputable ESG ratings and indexes can be valuable in your investment process. Organizations like MSCI, Sustainalytics and the Dow Jones Sustainability Index provide ESG ratings and rankings to help you evaluate companies. These sources give you insights into a company’s ESG performance, making choosing companies that align with your goals easier.

Align With Your Values

Your ESG investments should reflect your values. Whether you prioritize clean energy, ethical labor practices or gender equality, ensure the companies you invest in align with what matters to you. This approach builds a portfolio you can feel good about and supports businesses that contribute to the issues you care about.

Consider ESG-Focused Funds

Choosing individual companies that meet ESG criteria can be time-consuming for many investors. ESG-focused funds, such as ETFs or mutual funds, offer a simplified way to invest in a diversified range of companies that meet ESG standards. Professionals manage these funds and are often designed to balance risk and reward, providing an easy entry into ESG investing.

Stay Informed and Be Patient

ESG investing is a long-term strategy. It’s important to stay informed about evolving ESG standards and trends. This allows you to adjust your portfolio as necessary to meet new challenges. Patience is also essential, as ESG investing is about creating long-term value rather than short-term gains.

Monitor Performance and Reassess Regularly

Just like any investment strategy, ESG investing requires regular monitoring. Track your investments' financial performance and ESG impact. Reassess your portfolio as needed to ensure it remains aligned with your values and financial goals, especially as ESG standards evolve.

Compare the Best Brokers for ESG Investing

Before diving into ESG investing, it's essential to choose a broker who supports your goals. Look for brokers that offer a wide range of ESG-focused funds, reliable research tools and low fees. Compare the top options to find the right fit for your investing needs.

Make a Positive Impact with ESG Investing

ESG investing offers a way to align your financial goals with your values, all while potentially earning competitive returns. By carefully selecting companies and funds that meet ESG criteria, you can support positive change and make a difference in the world, one investment at a time.

Frequently Asked Questions 

Q

What is the primary goal of ESG investing?

A

The primary goal is to invest in companies that align with environmental, social and governance principles while aiming for strong financial returns.

 

Q

Can ESG investing be profitable?

A

Yes, ESG investing can be profitable, as companies with strong ESG practices are often well-positioned for long-term growth.

 

Q

What are the potential disadvantages of ESG Investing?

A

One potential disadvantage is that ESG criteria can limit your investment options and there may be lower returns in the short term than traditional investing.