Investing can be a complicated thing, particularly if you’re into ethical investing. And that’s where ESG investing comes in. The ESG stands for Environmental, Social, and Governance. Some people also refer to it as “sustainable investing”.
Impact Investing: What Does This Mean For Us?
In essence, this means that the investments are weighed for their long-term impacts on the world around us and on society itself.
Of course, it wouldn’t be an investment if it didn’t also consider the prospects of the business too.
The idea is to balance the needs of the planet with the need to make a profit and make informed investing decisions.
And no, this doesn’t hurt the prospects of the business at all.
The business isn’t meant to change the way it operates to seek investment, but rather to continue operating in an ethical and green manner in the way that it already does.
The Three Main Factors In ESG Investing
The main risks that are analysed in ESG investments are:
- Environmental. The investors will examine how the company has an impact on the ecosystem, the planet and human health. They will also look at mitigation plans for waste generation or polluting activity. In particular, they will encourage cost-savings through efficiency activities that, in turn, reduce energy or other resource expenditure.
- Social. Companies also have an impact on the communities around them. Investors in ESG want to know if wages are fair, that health and safety considerations are acted upon, that labor-management relations are good and that human rights are paramount. This ought to have a positive impact on the bottom line by reducing absenteeism, staff turnover and boosting the overall loyalty of staff to the business.
- Governance. This is a complicated way of saying “how the business is run”. This is an assessment of management and leadership practices and seeks to avoid traps like excessive boardroom pay or a lack of accountability to shareholders. This brings investors a better return on their investment.
Does ESG Investing Work In Practice?
We need to stress at this point that we’re bloggers, not financial advisers and we are not advising you to make any investments without consulting an independent investment professional. Having got that out of the way, yes, it appears that ESG investing is, currently, very profitable.
ESG uses an index similar to the Dow Jones or the FTSE and it’s called the JUST U.S. Large Cap Diversified Index.
That index has shown returns of around 15.94% annually since it was formed.
That’s slightly better than the market as a whole and certainly, 15.94% is a much better return than you might get in a bank.
What’s The Market Size Like For ESG Investing?
A great question. After all, small markets are often distorted markets – like cryptocurrencies where a small number of coin holders control the majority of the coins or even NFTs.
This leads to a lack of market liquidity and the perception that these coins are more valuable than they would be if they were freely traded.
However, this is a big market.
Currently, it’s estimated that $45 trillion (yes, trillion) is tied up in ESG investment funds globally.
And that another $50 trillion (that enormous number, again) will be invested in ESG over the next 2 decades.
That’s several orders of magnitude larger than cryptocurrency markets and gives investors assurance that this approach to investing is here to stay.
Is ESG Exactly The Same As Socially Responsible Investing?
No. They are very similar, of course.
But ESG is a defined grading system which allows investors to make informed decisions in investments.
Socially Responsible Investing doesn’t require this framework and often only uses exclusionary criteria (such as “we don’t invest in arms or tobacco”) to define the investment pool.
ESG is, thus, a better way to examine potential investments because it looks for reasons to invest rather than just to disqualify a potential investment.
How Do I Get Into ESG Investing?
You can invest in ESG indices and shares in the same way as any other stock market index.
However, most first time investors could probably use a little help – that means either seeking advice from an independent financial adviser or using a robo-advisor that specializes in ESG investments to automate your investing online.
You can try E*TRADE or Betterment for Robo-advisors but there are many other options.
Robo-advisors are often more cost-efficient for investors than advisors – however, you still need to investigate their method of working before committing to them, to make sure they are compatible with your investment needs.