ESG is one of the fastest-growing segments of investing, across the spectrum of financial products from ETFs to specialized, custom strategies. This growth makes them much easier to deploy in investment portfolios, and it also ensures that the individual values of the investor can be expressed in a way that can potentially help them meet their financial goals.
Breaking Down the Acronym
There are three components to ESG. The first two are usually most important to an individual investor, as they connect most directly to values. For institutional investors, the third one plays a role, under the theory that these principles can help to make the company better-run and more responsive to shareholders, which can translate into better financial performance.
Is the company an active participant in helping to support sustainability? Companies that support the move away from fossil fuels or participate in other key functions of environmentalism would be examples. But for companies that are not actively promoting sustainability, the question is more about the impact of the business on the environment. This can include everything from carbon footprint, toxic chemicals involved in manufacturing processes, and even how the supply chain is managed.
This used to be more about how workers are treated but has evolved into an understanding of how the company is structured and what the social impact is on the broader community. Companies that embrace diversity and work towards equality in all spheres – even to becoming advocates for social good beyond just their own hiring practices – are becoming the standard. Where companies used to avoid taking public stances on anything likely to be controversial, companies who take a stand are being rewarded, even if those gains are so far just in reputation.
This is about the company’s board and management. It includes everything from executive pay to diversity in leadership and how responsive a company is to its shareholders. This is where transparency, privacy issues, data security, etc. come into play.
Incorporating ESG into Your Daily Life
Incorporating your values into your daily life is easier now than it has ever been. One of the measurements for a company’s commitment to ESG is whether the company is a Certified B Corporation. These corporations meet the highest standards of verified social and environmental performance, public transparency and legal accountability. They work diligently toward maintaining these standards to balance profit and purpose.
But you’re not limited to just investing in Certified B-Corps – you can use your power as a consumer to shift your buying patterns to make a difference. On your next trip to the supermarket, take a look at the packaging of the products you buy. Many of them will display the B-Corp. symbol. And for those that don’t, there’s probably an alternative that does.
The Bottom Line
ESG has moved well into the mainstream and offers products and strategies that work for investors’ values while also working towards their goals. No matter what stage you’re at in your financial journey, incorporating ESG investing can be a long-term strategy and can provide opportunity. On the home front, being selective and intentional about the products you buy can make a big difference.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA