Want to build an investment portfolio that has a conscientious as well as a competitive edge? ESG investing makes it possible. Putting money into this type of investment vehicle could give you peace of mind — even during economically turbulent times.
A closer look at ESG investing
The “ESG” in ESG investing stands for “environment, social and governance.” ESG investing is synonymous with socially-responsible investing, impact investing, and other kinds of values-related investing.
Though ESG investing has been around in some capacity for a few decades, it began to take off as an emerging investment type in the 2010s. Penserra, a leading asset management firm, notes ESG investments grew 38% between 2016 and 2018. That’s a good sign for both individual and institutional investors. Millennials spurred this rapidly growing interest in ESG funds, companies, and other assets. However, it’s now become more mainstream. By the end of 2021, Reuters reported that ESG funds had increased in popularity, making up 10% of global assets.
ESG investments cover quite a bit of territory, as a quick breakdown of the acronym shows. For example, environmental investments can span anything from renewable technologies to sustainable food manufacturing. Social investments may fall under the auspices of fair housing, ethical healthcare, or organizations that tackle causes. Finally, governance investments may involve putting money toward whistleblower protection or lobbying agencies.
Is ESG investing worth the effort?
As you might have guessed, many people appreciate the sentiment behind ESG investing. Nonetheless, they may be concerned about whether or not ESG investing is a smart way to steward and grow their wealth.
If you’re wondering about the viability of ESG investing, consider the following reasons to fold ESG investments into your portfolio. First, remember that you should always speak with a trusted financial advisor before making significant changes to the existing makeup of your sustainability investments. A financial advisor will help you understand how to balance risks based on your goals.
1. ESG investments do well under challenging circumstances
It’s hardly a secret that the stock market has been all over the place since the beginning of 2020. The pandemic added so many disruptions to the world of investing. And the social unrest and worldwide uneasiness that followed on Covid’s heels only served to jumble the market further.
Yet, upon closer inspection, ESG investments performed surprisingly well compared to non-ESG counterparts. A 2021 academic paper from authors at Shanghai’s Fudan University School of Economics revealed that ESG stocks were less volatile than the average throughout the pandemic. This led the researchers to conclude that adding ESG investments to a portfolio could provide an attractive cushion for investors.
What’s behind the solid performance of ESG investments? One clue might be the consumer interest in supporting socially responsible companies and publicly traded entities. A Harvard Business School article explains that almost three-quarters of investors look at businesses’ social or green impact. ESG investments may not have felt the same market turbulence because they remained buoyed throughout the rough years between 2020 and 2022.
2. ESG grading makes it easier than ever to pick ESG investment vehicles
Years ago, it was difficult to know if an investment vehicle fell into the category of having high ESG marks. Now, a grading system has been put in place. This is known as an ESG score, and it’s relatively easy to find for any investment.
To be sure, ESG scoring is in its infancy. There isn’t one set scoring method used by all investment firms or companies. However, many ESG scoring calculation strategies are coming to the forefront. Plus, the same companies seem to be rising to the top of the charts.
For instance, Investors published a list of what it calls the 100 best ESG companies for 2021. Investors used a multi-level scoring approach to come up with results. In early 2022, CNBC reproduced a different top 100 ESG stocks list culled from a JUST 100 list. Unsurprisingly, both lists showed some overlap. The overlap demonstrates that regardless of the scoring methodology used, the strongest ESG contenders will rise to the top of most recommended investment vehicles. Therefore, you probably can find ones that you can feel assured are worthy of your or your clients’ ESG investments.
3. You can put your investing power behind causes you care about
It’s one thing to invest in a company or fund just because it’s likely to produce sizable returns. It’s another thing to invest in an idea or belief. Putting dollars into stocks owned by brands that align with your values can enrich your investing experience. Not only are you making your money work for you, but you’re making your money work for the world at large.
For instance, climate change continues to be a considerable worry. According to reports from the BBC, 60% of Generation Zers worry about humans’ toll on the planet. The New York Times notes that three-quarters of individuals who completed a recent survey were afraid for their future due to environmental concerns. Putting money into organizations, associations, and funds aimed at reversing damage to the earth could be cathartic and lucrative.
You can’t deny or overlook the personal satisfaction of conscientious investments, like sustainability investments, for example. A piece from Yahoo! exploring the skyrocketing appeal of ESG investing notes that 72% of American adults are at least moderately fascinated by the concept. However, only 11% of investors would rather choose funds and investment opportunities based solely on financial performance.
4. Many ESG investment assets have track records
Is it essential for you to make sure that you can see the performance track record for the investments you choose? You’ll appreciate knowing that plenty of ESG investments have been around long enough to show how well your money is likely to swell over the years.
Of course, you may find that some ESG investment stocks, companies, and funds haven’t been around long. Or, they might have started right before the pandemic. But, with Covid causing so many fluctuations, many investments went haywire between the start of 2020 and the end of 2021.
Still, that doesn’t mean that some of your portfolios can’t be devoted to ESG investing. A CNBC article issued in mid-2021 predicted that ESG investments could hit the trillion-dollar mark by 2030. What this means for you as an investor is that no one expects ESG investments to do anything but gather more interest and steam in the coming years.
5. You aren’t limited to just a few investment options
If you’re someone who likes to have a lot of investment choices, you’ll be happy to know that ESG investments keep growing. As of 2021, Goby reports that there are more than 500 sustainable funds available. That’s just the tip of the iceberg since sustainability investments only comprise one category of ESG investment.
The point is that there’s no reason to compromise on your principles. Want to build your money from where it is now to where you want it to be? Great. You can be certain that countless ESG investment vehicles and assets will fit your needs.
Of course, you may have to do your homework, especially if you’re a solo investor type. Digging around to find a company’s ESG rating may take effort. Still, it’s an effort that can pay off beyond just being a smart financial move.
6. It is becoming more mainstream to talk about ESG investing with a professional
Financial advisors are certainly not surprised to hear clients talk about ESG investments. However, remember that ESG investing has been around for a long time, at least in a niche way. Plus, it’s reaching peak popularity.
Gartner estimates around 85% of investors factor in ESG elements when putting together their sustainability investment strategies. This means that any solid, knowledgeable, modern financial advisor should understand the ESG approach to investing.
Even if you prefer to take a more DIY approach to setting up your investment portfolio, you can still find great resources online. Look for trusted names in the financial sector and read all you can about their experiences with ESG sustainability investments and investing. The more you educate yourself, the more confident you’ll feel picking and choosing between vehicles with impressive ESG scores.
Breathing new life into your Portfolio With ESG Investing
One of the best moves you can make as an investor is to look over your investment portfolio at least once annually. See how your investments break down and check out their historical performance. This exercise will help you gain essential insights into where you’re putting your investment dollars. It can also help you get a better sense of whether or not you want to swap out some of your assets with ESG sustainability investments.
Like all investing strategies, ESG investing requires attention and focus. Now that you know more about this trend heating up the investment world ask yourself if ESG investing makes sense. After all, ESG investments enable you to put your money where your heart, mind, and values are. And nothing beats returns that feel as good as they look on paper.
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