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Everything You Need to know About ESG Investing

In this age of acronyms replacing words--AFAIK for as far as I know or SMH for shaking my head— comes a new one for investors concerned about global warming. That’s ESG, and it stands for investments in the environmental, social, and governance spaces. It may not be on the tip of your tongue just yet, but IMHO ESG is SRSLY nothing to LOL about. 

Bottom line, investors care about profits (as well they should), but they’re also beginning to care as much about how their investments’ impact the world we live in. (For more on this idea, check out our post on Enlightened Self-Interest) Unnatural disasters like out-of-season hurricanes, heatwaves, and wildfires are increasing concerns over climate change, causing investors to wonder if and how their investments could be contributing to it.  

This movement started with investors primarily looking to “exclude” unfavorable investments from their portfolios (check out our post on Divestment), now ESG investing encourages “including” companies that contribute to making the world more environmentally responsible. While avoiding companies that can be viewed as harmful (like Big Pharma), investors can load up their portfolios with ESG stocks and funds that can either outperform the S&P 500, or least be profitable while still making a big difference (like renewable energy companies).  

Generational groups like Millennials, among the first to get into ESG investing, want to back companies they care about and that care for individuals, society and the planet. In 2020, Millennials contributed $51.1 billion to sustainable funds, a huge increase compared to less than $5 billion five years ago. They’re not the only ones gaining interest. Now Gen Xers & Baby Boomers are jumping on the EST (electric) bandwagon.  

ESG investing is more of an assessment of the non-financial factors measuring the sustainability and societal impact of an investment. It also helps determine the future financial performance of a company. If that still seems a little confusing (it does to us, and we’re writing this post), here is the breakdown of each and their impact: 

Environmental — focuses on climate change and the move to net-zero greenhouse gas emissions by 2025, including energy usage, waste, pollution, and conservation of other natural resources. Investors can include electric car makers and plant-based “meat” suppliers, but exclude companies contributing to pollution and animal extinction, such as mining and fossil fuels.  

Social — focuses on how a company manages its relationships with stakeholders, employees, customers, and the communities where it’s located. Social impact continues to increase awareness as social justice movements grow in mainstream visibility and acceptance like Black Lives Matter.  

Governance — focuses on how a company’s leadership operates in relation to policies, audits, diversity, executive pay, inclusion, shareholder rights, and sustainability reporting. One of the most common concepts pertains to how diverse the board of directors is, including gender and racial makeup.   

One of the challenges of ESG investing is the vocabulary, which can be confusing. Not only what is defined by “green” funds, fossil fuel-free or low-emission, but also the constantly changing landscape of new and different terminology. To help make things a big clearer, here are 10 of the underlying terms and themes in ESG investing: 

1 Climate Change — investors care about climate changes and are interested in how it affects a company, especially in relation to renewable energy trends. 

2 Biodiversity — the extinction of animals and plant life around the world is a critical environmental concern, having serious impact on accelerating our climate crisis. 

3 Social Inequalities — the recent pandemic intensified the discussion of social and gender inequalities, and investors are interested in the welfare of the workforce, the community, and supply chains.  

4 Digital Ethics — as our world becomes even more digital, concerns about privacy, cybersecurity, ethical design, and artificial intelligence are a constant consideration. 

5 Digital Inclusion — piggybacking on #4, this theme focuses on access to digital information, plus the skills and benefits connected to using these technologies. 

6 Corporate Issuers — corporations are concerned about green and sustainable bonds as they continue to become more available, not just about stock values and fixed incomes. 

7 Standardization — future regulation will become more mandatory, rather than voluntary, based on standard-setters such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB).  

8 Supply Chain Management — companies will need to be more transparent about labor practices, health & safety, and human rights in light of lessons learned during the pandemic.  

9 Being Mainstream — while environmental investments were once a niche market, they are quickly becoming mainstream as more concern develops for our environment. 

10 New Benchmarks — as investors explore these new options in the sustainability arena, they should expect different benchmarks compared to those in other industries. 

Another challenge with ESG investing is the personal interpretation of what is most meaningful to both the investor and the environment. What if a company focuses on the environment, but doesn’t treat its employees well? What if you’re a fan of the product, but the company has supply chain issues? 

The good news is, it’s not a one-size-fits-all solution. In this whole new world of ESG investing, investments can be customized to what matters most to the investor (besides profits). Maybe it’s companies with women CEOs or ways to help save the planet.? It could focus on plant-based meats or helping solve the climate crisis. Investors can choose what is most important to them, while putting what concerns them less on the back burner. 

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