ESG Investing: Doing Well by Doing Right
By Nicole Schlichting
In today’s ever-shifting financial market, investors are constantly faced with the choice between playing it safe or taking risks. With the sweeping onset of Socially Responsible Investing (SRI), a driver of this risk dilemma has been the lack of information on the ethical impact of the assets in your portfolio; in the past especially, it has been difficult to decipher whether or not a particular company was truly as altruistic as they seemed to appear on the outside. Investors often had no choice but to close their eyes, cross their fingers, and hope for the best.
Luckily for all of us, the past few years have seen the birth of an age of shareholder activism and investment disclosure spawned by the popularization of so-called ESG Investing. ES-what now? I thought that was the stuff in chemically processed foods? Nope. ESG refers to the environmental, social, and governance-related policies in any given company. In a time when such a sharp eye is being focused on environmental impact, human rights, and corporate conscientiousness across virtually all sectors, checking and analyzing a company’s ESG rating before investing is a fantastic way to measure the ethical impacts and sustainability of the assets in your portfolio. But what does ESG even mean? Let’s break it down by letter:
E: Environmental
This branch of the ESG tree focuses on any given company’s views / policies concerning issues such as greenhouse gas emissions, climate change, deforestation, resource depletion, waste and pollution, etc. Many companies have recently been inclined to take steps in the right environmental direction, such as monitoring their carbon footprint or making the switch to renewable energy. In analyzing this component of a company’s ESG information, you will be able to get a sense of whether or not said company is concerned and/or active about important environmental issues.
S: Social
Nearly as self-explanatory as E, the S branch of the ESG tree refers to the social concerns within a given company, such as human rights, animal welfare, consumer protection, diversity, health and safety, impact on local and indigenous communities, etc. In recent years, many companies have been pushed to publish their policies regarding such social concerns as investors want assurance that the social conditions are up to par before they invest.
G: (Corporate) Governance
This branch is the arguably most abstract of the three, as it refers to the ethics of the corporate structure and policy of a given company. Think: executive pay, management structure, employee/employer relations, tax strategy, board structure and diversity, political lobbying/donations, etc. In essence, a big ol’ spotlight on all those corporations that until now may have been flying under the ethical radar — we’re watching you now.
Cool, what does this all mean? The shift towards ESG Investing is beneficial for a number of reasons. First of all, it allows investors to assess companies individually rather than by sector; in the past, entire industries (think: tobacco, firearms, alcohol, gambling) were shied away from due to their compromising nature. Now investors can look at the overall impact of a specific company rather than blacklisting it simply because of its sector.
Second of all, this kind of investing really puts the pressure on companies to change their environmental, social, and corporate policies. Sure, consumers can create change based on their spending habits, but when the investors start paying attention, the progress will be expedited even further. In the past decade, we’ve already seen some big names climb on board the ESG-wagon in an attempt to improve their image in the eyes of both consumers and investors:
- Environmental changes: PepsiCo, Coca-Cola, Ford, PG&E, Adobe
- Social changes: General Electric, Starbucks, Johnson & Johnson
- Governance changes: Alcoa, Xylem, Exelon
Have Your Cake and Eat It Too!
Finally — and arguably most vital for the individual investor — ESG investing makes financial sense, contrary to popular belief; many still think you have to choose between portfolios that make little financial sense but give you the feel-goodies, or money-making portfolios that might leave you with a sour taste in your mouth. Not the case! According to PRI Association, “responsible investment can and should be pursued even by the investor whose sole purpose is financial return, because it argues that to ignore ESG factors is to ignore risks and opportunities that have a material effect on the returns delivered to clients and beneficiaries.” Basically, you should invest in companies with good policies and green-aspirations because to not do so would risk a long-term loss (after all, we’re headed for even more extensive corporate scrutiny in the future).
In a world increasingly concerned by issues such as climate change, social injustice, and corporate corruption, ESG Investing is a sustainable and responsible alternative to traditional investing that presents you with the information you need to make both a fiscally and ethically sound portfolio. By choosing to invest in companies with good ESG scores, we as individuals are facilitating the shift in our corporate climate towards better environmental, social, and governance policies and, in doing so, changing the world. Want to learn more? Check out Grow’s website for more info!
