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ESG investing

Learn how you can generate profit while investing in sustainable companies to help make the world a better place.

Environmental, social and governance (ESG) investing is a type of ethical investing that focuses on creating positive benefits for people and the planet while also ensuring that the companies you invest in are governed responsibly. Find out more about ESG investing and learn how you can buy stocks and other investments to promote global sustainability and benefit financially in the long run.

What is ESG investing?

Environmental, social and governance (ESG) investing lets you use the money you invest to create positive social and environmental change. It also lets you measure the social, environmental and corporate governance practices of different companies to make sure they have sustainable business models.

The idea behind this investment strategy is that if you invest in a company that is “putting its best foot forward”, you’re more likely to generate sustainable returns in the long run. You also get to feel good about your investments and know that you’re helping the world and its people to build a more just and prosperous future.

What does “ESG” mean in practice?

There are 3 main components of ESG investing: environmental, social and governance. Companies and funds can meet ESG criteria by carrying out some of the following activities:

EnvironmentalSocialGovernance
  • Cutting carbon emissions
  • Reducing waste
  • Eliminating air and water pollution
  • Improving energy efficiency
  • Protecting biodiversity
  • Implementing strong environmental policies
  • Promoting diversity and inclusion
  • Upholding human rights and labour standards
  • Boosting employee engagement and morale
  • Paying a reasonable living wage
  • Contributing to the local community and economy
  • Ensuring diverse boards and committees
  • Paying executives a reasonable wage
  • Eliminating bribery and corruption
  • Carrying out regular financial audits
  • Having a regular system of checks and balances

Why choose ESG investing?

ESG gives you the opportunity to invest in companies that are leading positive change in their communities. These companies are usually driven by a sustainable business model which makes them less risky than other companies that are not thinking progressively about how to keep pace with social and environmental change.

For example, investing in renewable energy may be considered less risky than investing in oil and gas right now, as more and more governments and companies are looking to phase out fossil fuels. It’s also less risky to invest in companies that protect their workers and pay them fairly, since they’re more likely to be productive in the long term.

ESG investing vs socially responsible investing vs impact investing

ESG investing, socially responsible investing and impact investing are 3 different branches of “ethical investing”. All types of investing aim to channel funds towards initiatives and companies that are striving to make the world a better place.

The differences between ESG investing, socially responsible investing and impact investing are highlighted below:

  1. ESG investing. ESG investing allows you to select companies that are making an active effort to act in an environmentally or socially responsible way. It provides an ESG score that measures the environmental, social and governance practices of an organization to ensure it meets sustainability principles.
  2. Socially responsible investing. Socially responsible investing is similar to ESG investing, but it lets investors apply filters to screen investments in or out based on their values. For example, filters can exclude harmful industries (such as guns, tobacco or gambling) or include specific initiatives such as those that address climate change or gender equality.
  3. Impact investing. Impact investing lets investors put money into companies that are making a “measurable” difference in specific areas such as poverty reduction or environmental protection. It often relies on targeted indicators to quantify how well a company is meeting ESG pillars.

How is the positive impact of ESG investing measured?

The positive impact of ESG investing is measured by an ESG score, which works a bit like a credit score for your investments:

  1. ESG scores measure 3 factors: environmental impact, social impact and governance impact.
  2. The total of the 3 elements makes up a score of between 0 and 100.
  3. Lower scores are issued to more ethical and sustainable stocks/companies, while higher scores are assigned to companies with more ESG “risk”.
  4. You can often find a company’s ESG score by searching for this information online or through the analytic functions in your trading platform.
  5. You may also be able to factor in a company’s “controversy score” as part of your ESG assessment.
  6. This score shows if a company has been involved in any lawsuits or questionable business practices that could make it riskier to invest in.

Do you make more money with ESG investing?

The amount of money you make with ESG investing will depend on what stocks and companies you invest in. Many investors agree that investing in sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors.

Even so, there’s no guarantee that ESG investing – or other forms of ethical investing such as socially responsible investing or impact investing – will net you higher returns over time.

What are some ESG companies?

You can usually find eligible ESG companies through your stock trading platform. Below are some companies with solid ESG scores (remember, low scores are better).

CompanyTickerEnvironmentalSocialGovernanceTotal ESG score
AlphabetGOOGL0.59.912.522.9
Progressive CorporationPGR2.19.313.124.5
MicrosoftMSFT0.59.45.115
MastercardMA0.17.78.916.7
VisaV0.19.87.417.3
Procter & GamblePG8.29.5724.7
AppleAAPL0.51310.223.7

Source: Sustainalytics

Source: Sustainalytics

What are some ESG funds?

ESG funds combine several ESG companies/stocks into one pool so that you can invest in multiple ethical companies at once. Some popular ESG funds are listed below:

FundTickerEnvironmentalSocialGovernanceTotal ESG score
Morgan Stanley Intl AdvantageMFAPX3.98.67.419.9
Amana GrowthAMAGX3.89.4720.2
ImanIMANX2.59.66.919
Brown AdvisoryBIAWX3.410.36.920.6
Putnam Sustainable LeadersPNOPX3.810.2721
Calvert EquityCSIEX3.19.87.120
Ave Maria GrowthAVEGX2.69.86.518.9
Ninety One Global Environment Fund6.046.855.7118.6

Source: Sustainalytics

Source: Sustainalytics

Pros and cons of ESG investing

Pros

  • Using your money for good. You’ll be able to align your investments with your personal values to help make the world a better place.
  • Growing market. The demand for ESG investments is growing, which means more brokerages and robo-advisors are building ESG portfolios.
  • Could reduce risk. You may be able to use ESG criteria to avoid companies that could pose a financial risk if they have questionable business practices.

Cons

  • Not profit-centred. There could be a tradeoff between generating profit and meeting ESG pillars, depending on which stocks you invest in.
  • More research. You may be required to put in more time and energy to build an ESG portfolio since you’ll need to compare ESG scores for various investments.

Bottom line

ESG investing is a type of ethical investing that lets you track the environmental, social and governance performance of various investments. This lets you choose investments that will help you generate profits while helping to build a more inclusive and sustainable future for all.

Frequently asked questions

This article offers general information about investing and the stock market, but should not be construed as personal investment advice. It has been provided without consideration of your personal circumstances or objectives. It should not be interpreted as an inducement, invitation or recommendation relating to any of the products listed or referred to. The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please get financial advice. The author holds no positions in any share mentioned.

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