ESG investments have taken the world by storm, as more people look to put their money in companies that align with their values.
But what is ESG investing and is it worth it?
Keep on reading to find out.
What Is ESG Investment?
ESG stands for Environmental, Social, and Governance.
ESG investment is a form of investing where the investors put money in companies that promote positive environmental, social, and governance factors.
How Does ESG Investing Work?
ESG investors look at the sustainability score of the company to determine whether they should invest in it. The score is based on a company’s ESG practices, including:
| Environmental | Social | Governance |
| Carbon footprint Waste management and usage Water and air pollution Green initiatives Biodiversity | Employee gender diversity Ethnic diversity Human rights Labour standards Sexual harassment policies Data security | CEO compensation Board members diversity Lobbying Corruption Large-scale lawsuits |
How Are ESG Scores Calculated?
Companies’ ESG scores are calculated by ESG research firms that determine the rating based on multiple criteria. Researchers weigh a company’s impact on society, the environment, and then look at how it treats its employees and conducts businesses.
These scores, most of which follow a 100-point scale, help investors compare different investments in a wide variety of industries. The higher the score, the better the company’s rating.
Because several firms issue ratings, their numbers may vary depending on their metrics schemes.
They often consider carbon emissions data; water usage data; waste data; diversity data; board composition data; employee satisfaction data; and community engagement data.
Benefits and Risks of ESG Investing
In addition to having a more sustainable investment portfolio, other benefits come with being an ESG investor.
- Risk reduction: Some studies have shown that companies with strong ESG ratings tend to have lower downside risk similar to money market funds.
- Making a change: Investing in ESG companies can help make a difference in the world by promoting positive social and environmental change.
- High return rates: There are financial benefits to consider as well. Many ESG stocks have outperformed traditional funds in recent years comparable to multi-asset investing.
Risks associated with ESG investing include:
- Performance assessment: It can be more difficult to assess a company’s overall performance based on ESG standards, compared to traditional financial measures.
- Missed opportunities: Investors who solely focus on ESG investing companies and their scores may miss good investment opportunities.
Ultimately, the benefits and risks of ESG investing depend on an investor’s goals and risk tolerance.
How To Get Started in ESG Investing?
If you’re interested in getting started in ESG investing, here’s how to do it:
- Look for ESG investment funds or ETFs: There are a growing number of mutual funds and ETFs that focus on ESG investing. This is a great way to get started, as these funds will do the research for you and give you exposure to a range of companies that align with your values.
- Choose companies that align with your values: You can do this by looking at a company’s sustainability report or reading its annual report.
- Talk to a financial advisor: Some financial advisors specialise in ESG investing and can help you get started.
If you think that ESG is a little complicated for you, other innovative investment strategies like robo-investing are great for beginners.
ESG vs SRI vs CSR
ESG, SRI, and CSR are all different types of investing.
ESG investors focus on the long-term financial performance of a company rather than just its short-term profitability. ESG factors include climate change, employee relations, human rights, corruption, and product safety.
SRI stands for “socially responsible investing” and is the practice of investing in companies that meet certain ethical or moral standards. SRI investors generally avoid buying stocks in companies that produce fossil fuels or manufacture firearms.
CSR is short for “corporate social responsibility” and refers to companies that make efforts to improve the social and environmental conditions in which they operate. CSR initiatives can include things like donating money to charity or investing in renewable energy.
The main difference between ESG, SRI, and CSR is that ESG investors are ultimately interested in a company’s efforts to positively impact society, SRI investors look at a company’s ethical performance and CSR investors focus on businesses that hold themselves accountable for their social commitments.
Bottom Line
So, what is ESG investing? It’s the practice of investing in sustainable companies that promote positive environmental and social change.
ESG investing has been growing in popularity in recent years, which has prompted companies to start to incorporate ESG criteria and ESG investing strategies into their decision-making process.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.