ESG is gaining a lot of attention in the world at the moment. Only being practiced for investing since the 1960s, Environmental, social, and corporate governance has been a booming topic in recent years but is somehow confusing to some.
The reason for the confusion comes from the name. How? Well, the ESG can be called in many different ways. This comes solely from a personal level. Some call it Ethical Investing, Sustainable Investing, Green, Impact, and so on. Altogether they mean the same thing and today we are going to talk about what ESG is.
What is ESG?
ESG stands for Environmental, social, and governance. The meaning becomes much simpler once we divide the name. So, Environmental – how companies treat the planet; Social – How do companies treat people; and Governance – how a company is being run.
Their criteria are important to socially conscious investors. They consider the environmental part of companies (e.g. how safe they are to the environment, their policies on climate change, etc.). They consider the social part (e.g. companies’ relationship with employees, customers, etc.). Last but not least is the governance part (e.g. leadership, audits, shareholder rights, etc.).
How Does it Work?
By keeping the ESG criteria in mind you can invest in companies that are trying to make a difference in the world. At the same time, you can rule out companies that have a negative impact, based on personal opinions, and not invest in them.
This is due to ESG’s criteria for companies and so you can see what companies are making a difference. So to understand it better let us get some examples.
Let us say you have a list of some companies you wish to invest in. Some companies have a lot of alcohol and tobacco distribution and others work with fossil fuels. Now you have the chance to rule out some companies that fit outside of your ethical standards and comfort zone.
If you are not pro alcohol and tobacco you rule out the companies distributing them and do not invest. If you are against climate change then you rule out companies working with fossil fuels. Same for many other fields but we get the point. Although this is not a technique much use it is still useful through ESG investing.
The technique that most people use in ESG investing is constantly keeping an eye on companies that are trying to make a change in the world. For example, companies fighting against climate change, companies that have 30% of their workforce women, and so on.
This allows investors to see what is worth investing in. Through their criteria and ESG investing you can help the world by investing in companies who are also willing to help the world and the people.
Why is ESG Popular?
Since the pandemic hit, ESG investments have seen better results for long-term investing. This means that investing in ESG now is a great opportunity if you decide you want to keep those investments for around 10 year period of time.
Since ESG prices are relatively cheap now it is a great investment for long-term return. Some forecasters and experts say that if you invest in ESG now, not even that you are doing good for the environment but you are also seeing a possible great return in a long time.
How To Invest In ESG?
As we mentioned, investing in ESG is a sustainable investment that takes into consideration environmental, social, and governance factors. U.S. investments and assets under the management of ESG criteria and factors grew around 42% just from 2018 to 2020.
That is a jump from around $12 trillion to around $17 trillion in just 2 years. We think that says a lot about how popular and useful in long-term trading ESG has become. ESG has many benefits aside from having a sustainable investment. Here are some of those benefits.
ESG Has Lower Investing Risks
Compared to other, more “traditional”, forms of trading and investments we have seen, ESG has shown less risk of investment. What does that mean? Well take into consideration that ESG has grown a lot over the years and every time has shown that their prices, even when going down, do not show major slopes and not for a long time.
This has been also shown by many studies done, one of the most known is the Morgan Stanley study, which shows that these sustainable funds and investments have a lesser chance of downside risk compared to other forms of investments.
Investing In ESG Could Lead To High Return
The same study by the Morgan Stanley institute shows that from a period of 2004 to 2018 (around 12 years) the return of profit from investing in ESG was somewhat the same as traditional sustainable investment funds.
Other studies show that ESG can outperform greatly these traditional investments since from 2018 it has had a major growth and has become more popular as a sustainable investment fund. It is also believed that in the next few years investments will outperform and grow a bigger profit due to their popularity. Though this is only speculation.
ESG Investment Types
There are some different ways of investing in ESG. If you decide to invest we believe that it is a good decision to be taking. Here we will talk about the two main ways of investing in ESG.
Investing In ESG Stocks
Investing in a stock is a common way of investment so it is well known amongst people. Though we do not recommend putting all your money on one particular company unless you are well aware of that company and are sure of your investment.
Instead, we recommend investing a little in many companies so you help more companies that are trying to help the world and also spread out your investments. However, investing in stock is to be done personally when and how you want to.
Investing In ESG Mutual Funds
Our second main way of investing in ESG is Mutual Funds. The number of funds given to people in the last few years has grown a lot. For example in 2018 there were a mere 270 open-end exchanging funds whereas in 2019 it grew to 303. Now in 2022, there are around 550 mutual funds in ESG.
Investing in mutual funds is simpler than investing in stocks. Why? Well, most investments are dedicated to one problem, for example, Climate Change, and it is easier to know where you are investing. Make sure to have your online broker offer you a mutual funds screening tool. This will help compare different funds.
How To Start Investing In ESG?
If you are interested in investing in ESG now we will talk about how to invest step by step. The steps are not too complicated. ESG has been growing more and more every year so the categories in which to invest are growing as well to give you more opportunities.
Step 1: Get Help or Do It Yourself?
In the investing and trading world, you have two choices, to invest yourself or to get help with investing. Investing can be tricky and may need a lot of attention at times. If you are not a full-time investor it is good to get help from advisors. If not, doing it yourself is your way to go.
I Want to Invest My self
If you have invested before or you believe you can invest yourself you are free to do so. Investing comes in different ways. If you are interested in investing short-term you will need to spend more time looking at the rates of different stocks and companies.
If you are interested in long-term investing you do not need to pay that much attention. Checking up on your investments now and then is enough to keep track of how the rates are going.
I Want Help With Investing
Let’s say that you are working most of the time. Or maybe you are caught up with other responsibilities but want to invest. Maybe you are new to investing. Well getting help from an advisor may be your way to go.
Advisors come in two different ways. In-person advisors and Robo-advisers. Robo-advisors are “robots” that take care of your portfolio and the rates of the companies you invest in for you. They are usually much cheaper than in-person advisors.
Step 2: Take a Look At Your ESG Criteria.
We talked about the main criteria that ESG provides for its users and investors. Choosing your criteria is very important. This way you can know for sure what the main categories of companies you want to invest in are.
Let’s say you want to invest in companies that are fighting climate change, or maybe companies that are giving women a bigger chance in their fields. After deciding the criteria now it’s time to invest and open your portfolio.
Step 3: Open a Brokerage Account and Choose Your Investments.
After you open an account everything after is as simple as it sounds. All you need to do is open a portfolio and choose the companies you want to invest in. We recommend reading more and learning more before you invest.
Takeaways
- Environmental, social, and corporate governance has been a booming topic in recent years but is somehow confusing to some.
- By keeping the ESG criteria in mind you can invest in companies that are trying to make a difference in the world.
- Since the pandemic hit, ESG investments have seen better results for long-term investing.
- The technique that most people use in ESG investing is constantly keeping an eye on companies that are trying to make a change in the world.
- U.S. investments and assets under the management of ESG criteria and factors grew around 42% just from 2018 to 2020.
- ESG has many benefits aside from having a sustainable investment.
