Do you want to fund socially-responsible firms? Discover this strategy for ethical investing! [Wednesdays: The Independent Investor]
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A Note from Miles Everson:
We’re thrilled to share with you another investing insight in today’s “The Independent Investor.”
Every Wednesday, we publish articles about investing because we believe this activity can help you achieve true financial freedom.
Today, we’ll talk about a type of investment that’s been gaining traction for a few years now.
Continue reading to know more about environmental, social, and corporate governance (ESG) investing and how it can benefit your investment portfolio.
The Independent Investor
Throughout the years, an increasing number of investors have poured their capital in companies committed to making a positive impact in the world. Gone are the days where investing is solely about getting sizable financial returns.
This shift in behavior is due to the environmental, social, and political problems that have surfaced throughout the decades.
As a result of this change in investment attitude, those with capital have turned to this specific type of strategy:
Environmental, Social, and Corporate Governance (ESG) Investing.
Photo from Kiplinger
ESG investing integrates environmental, social, and governance criteria in the selection and management of assets while also prioritizing financial returns.
This type of investment strategy has gained traction throughout the years. According to a 2020 study from the Organisation for Economic Co-operation and Development (OECD), “the amount of professionally-managed portfolios that have integrated key elements of ESG assessments exceeds USD 17.5 trillion globally.”
So, what are the primary criteria ESG investors look at when screening companies to invest in?
- Environment – This refers to a company’s climate, energy, waste management, and pollution policies. Additionally, this criterion includes a firm’s compliance with environmental regulations like greenhouse gas emissions and carbon footprint.
- Social – This aspect is about a firm’s practices as it relates to its stakeholders. These considerations include policies on labor, local communities, data protection, privacy, customer relations, race, gender, and human rights.
- Governance – This refers to a company’s policies on leadership, board composition, transparency, accountability, and diversity.
The Difference Between ESG and Socially Responsible Investing (SRI)
Given the list of considerations stated above, one might come to the conclusion that SRI and ESG investing are the same. While these strategies share the same concern for the social and environmental impact of investments, they have a key difference.
In SRI investing, the primary goal of an investor is to invest in a company that complies with a specific ethical concern. This means he or she is willing to forgo specific investments that go against his or her beliefs.
On the other hand, ESG investing isn’t just about providing capital to companies that meet a specific set of criteria; profitability is a priority in this strategy too.
Finding the Right Company to Invest In
Identifying companies that fit an investor’s values and profitability targets can be challenging. As a result, studying ratings and reports have become an important part of ESG investing.
To help investors in their decision process, independent analytics firms rate the performance of a company based on its exposure to long-term environmental, social, and governance risks in relation to its competitors.
Aside from ratings, a company’s ESG reports is another source of information. These disclosures allow investors to analyze a firm’s track record and priorities on environmental, social, and governance issues.
While ESG ratings and reports are useful in screening potential investments, these pieces of information come with their own set of drawbacks.
First off, there’s a lack of standardization in ESG ratings, making it difficult to compare companies across different industries and market segments.
Additionally, due to the lack of uniformity, investors may find themselves overwhelmed with a host of reporting standards that give varying pictures of the same firm.
There’s also the problem of “greenwashing” where firms make false or misleading claims about their compliance with and commitment to ESG standards.
To mitigate the drawbacks of these pieces of information, it’s important for investors to do their due diligence and carefully research the companies they want to pour their capital into.
Aside from analyzing ratings and reports, there are also ESG-tailored exchange-traded funds (ETFs) or mutual funds. These active and passive investment options will expose investors to a broad range of companies across different markets, thereby diversifying their options.
A Portfolio that Aligns with Your Values
In conclusion, ESG investing is a useful strategy for investors who want to make a positive impact in the world with their money.
By considering a company’s environment, social, and governance factors in addition to its financial performance, you can do business with firms that align with your values. Moreover, you’ll be able to diversify your portfolio.
So, if you haven’t yet, use what you’ve learned from this article and apply it to your investment strategy!
Remember: As with any other type of investment strategy, ESG investing requires due diligence when finding companies to support financially.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
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