Investing

Is ESG Investing Good For You?

ESG investing is an investment buzzword that you may have heard of. What exactly is ESG investing? Is it a good idea to follow this approach? Or, is it simply one of the latest passing investment fads? Bay Area wealth advisors are increasingly fielding questions from their clients on the topic of ESG investments.  Let’s dig in and assess this current investing trend.

What Is ESG Investing?

ESG is an acronym. E stands for “Environment”, S refers to “Social”, and G is short for “Governance”. Let’s hone in on these themes:

• Environment: Issues revolving around the environment are existentially important and rightly loom large these days. Climate change and other green issues confront the globe and directly affect international commerce. As a result, companies are becoming more “green”, and investors are tuning in.
• Social: Matters and issues that affect people individually, regionally, or as demographic groups comprise the social part of investing. Gone are the days when simple profit-loss statements, debt levels, and P/E ratios were all that mattered for good, sound investment decisions. Today, investors increasingly look for information on how the labor practices of a firm improve the community or how the chain of supply affects the social fabric, both locally and globally.
• Governance: In today’s business world, governance means that all company matters and high-level decisions are good for everyone involved, from the employees and stakeholders in the community at large.

Is ESG Investing the Same as Socially Responsible Investing?

In a nutshell, yes. They are synonymous terms. Here are the typical ways for individuals and investment firms to sharpen ESG investing methodology:

• Exclusionary Investment Approaches: In this approach, firms that do not adhere to ESG principals are excluded from the investment portfolio. An example of this is a portfolio that does not include tobacco firms.
• Integrated Investment Approaches: This focus looks to make investments in companies that are analytically identified as incorporating ESG themes into their business models and day-to-day practices.
• Impact Investment Approaches: where investments are considered in those firms that are actively solving some of the current big ESG challenges through innovative products or services.

Some of the specific themes that accomplish ESG goals and may benefit savvy investors include low-carbon energy sources, data and cyberspace privacy, power generation safety, and sustainable foods, among others.

How Does ESG Investing Differ from Regular Investing?

In many respects, there is no difference. Both “regular investing” and ESG investing seek out the best rates of return for investors. These days, with so much on the line socially and environmentally, those firms that operate with sustainable ESG practices are likely to be long-term top performers. For many investors and investment firms, there is no difference between “Good” investing and “ESG” investing.

As society’s expectations of businesses continue to evolve, it will be imperative that investors stay ahead of those expectations. If they haven’t already, investment firms will clearly need to become fluent and comfortable with evolving ESG themes. How does your investment advisor utilize ESG investing techniques?