Why is ESG Investing So Appealing?
For more than 200 years, long before the advent of modern stock markets and electronic trading, some investors have been committed to socially-responsible (SRI) investing.1 This involves choosing companies and products that specifically eschew certain harmful or toxic behaviors.
But over the last few years, this modest SRI movement has blossomed into a committed cross-section of investors who are interested in environmental, social, and governance (ESG) investing. Why the sudden interest in this category of investments, and what should investors know before getting started?
What ESG Means for Investors
ESG investing focuses on a few simple principles. Environmental investments include companies that are committed to fighting climate change and diminishing their carbon footprint. Socially-conscious companies focus on products and services that boost the general good. And governance-minded investments are committed to diversity among executives and management personnel and transparent, non-discriminatory business practices.
There are a few important benefits investors can realize by jumping into the world of ESG products.
Investors need not worry that a commitment to ESG investing means sacrificing high return rates. In fact, companies that are focused on sustainability are likely to use their resources as efficiently as possible, boosting revenue and increasing innovation over time.2 Instead of acting with a singlehanded focus on quarterly profit figures, these companies are looking to the long term to ensure that they can continue to evolve.
Simple, Streamlined Investments
ESG investing doesn't need to be complicated or risky; in fact, it's likely that you already own some stocks, ETFs, or other investments that are properly classified as ESG. If you're worried about putting all your figurative eggs into one basket, you may want to look into index funds or ETFs that spread risk across dozens (or even hundreds) of companies that have committed to ESG principles.
What To Look For
Over the past decade or two, ESG concepts have gone from "nice to have" to an integral part of a company's fiduciary duty to its investors. This means that, when evaluating prospective investments, investors must look beyond the ESG label to determine whether the company's financials are strong and its outlook is bright.
You'll also want to consider how any new ESG investments fit into your overall asset allocation. For instance, if you're someone who is tempted to sell (at a loss) whenever the market drops, you'll want investments that don't experience much volatility. Those with a bigger appetite for risk may want to consider purchasing individual stock shares.
As the second decade3 of a historic bull market begins, ESG investments are taking center stage. No matter your risk tolerance or investment sophistication, with just a bit of research, you can capitalize on this trend by investing in companies that are committed to ESG principles.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
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