What is Sustainable ESG Investing?

It can be difficult to know which stocks and companies to invest in. You could follow the financial figures and go with a safe bet without paying too much attention to the company. But, what if that company turns out to be discriminatory and unethical with bad environmental practices? Could you let that go, or would you rather be sure that you invested in someone that shared your values?

ESG (environmental, social, and governance) investing promises to take a different approach by offering opportunities to invest in companies with a clearer conscience. So, what is ESG investing, how can it benefit those looking for environmentally friendly options, and what do you need to look out for?

What Is ESG Investing And What Are ESG Funds?

ESG stands for environmental, social, and governance. There are different criteria for each aspect.

• Environmental: How do companies operate in a way that helps to protect the environment or lessen their impact upon it? Are they keen to make a positive change?
• Social: How do companies work to give back to communities, either in local enterprises or on a national scale? Are they keen to donate profits and help workers?
• Governance: How do companies show their ethics and transparency in executive affairs and work with shareholders? Can they be trusted to do the right thing?

There are a few different names for this sort of venture. The term responsible investing is more of a catch-all term that covers trustworthy companies. Others use the term sustainable investing, which makes sense when focusing on environmental criteria. 

ESG funds are a way to target these environmentally-conscious investment options for the best return. They are often a collection of stocks that you invest in, as opposed to picking individual companies on your own.

Environmental Issues And Sustainable Investing

The environmental side of ESG investing is what draws in a lot of investors. For many, there is a greater sense of urgency here as climate change evolves and we lose natural landscapes and considerable biodiversity. 

These earth-conscious investors realize how much power and potential impact these big companies have on our environment and want to put their money where their mouth is. 

Because of this, there are several factors at play with the environmental credentials of ESG investments. These include the following.

1) Energy use

Companies need to prove that they take action to reduce the amount of energy used in their operations. This will largely concern production plants and any large-scale machinery there. But, there are also measures in corporate buildings and offices, such as switching off unnecessary lights and using more energy-efficient climate control.

2) Pollution and waste

Pollution comes in different forms. There are the pollutants created directly by the company, such as through emissions and chemicals into water supplies. But, there are also pollutants and waste from the use of any products by the consumer.

3) Natural resource conservation

Companies that use sustainable materials like wood and other plant-based options are great as long as they do so responsibly. This could include working with organizations like FSC (Forest Stewardship Council) and pledging to protect local habitats. This could be as simple as donating a percentage of profits.

4) Treatment of animals

If the company requires animals in any form, it helps to know that they are well-treated. For some investors, this may not be enough and they prefer to invest in vegan and cruelty-free companies with no animal interaction.

5) Climate change

It also makes a big difference if a company can prove they have a plan of action to help reduce its impact on climate change. This means clear targets for reducing emissions and their carbon footprint. This could include factors like emissions from delivery vehicles and a commitment to more solar energy.

Why Are ESG Investments So Popular?

ESG investments are seen as a great option for those new to the world of investing, especially younger clients that might be more interested in the background of a company before they commit. 

Some more old-fashioned investors are of the mindset of purely working with options that offer the best return and long-term benefits. They don’t care if the company has a bad track record on employee rights, carbon emissions, or transparency as long as there is a good chance of a profit. 

ESG investors tend to have a stronger conscience about these things and aren’t comfortable without a guarantee that their chosen investment is ethical.

Investments in companies with environmental credentials are increasingly popular as we continue to see the damage caused by global business. Massive corporations may be on the rise, making it the ideal time to buy in, but this could mean an even bigger negative environmental impact.

Investment Comparison Example

Let’s take a large beverage producing company as an example. Assume it is common knowledge that they aren’t the most ethical company in terms of business practices. They also produce a lot of single-use plastic – even if the bottles recommend recycling. Add to that the energy costs to produce the products and it leads to a big problem.

A small-scale drinks company that has a greener message may be more appealing. For example, they may pride themselves on only using cans for their natural products. They may also have a small operation that hires local people, gives money to charities, and tries to be open about its practices. The scope for profit may be smaller, but you might also feel better about yourself for choosing them.

Supporters also cite the low risk of dramatic falls in value due to controversies. The idea is that when you have an ethical company that promises to do no wrong and actively gives back, that investment shouldn’t blow up in anyone’s face. However, this works on the assumption that all ESG investment options are honest about what they do and that the brokers aren’t trying to oversell something.

Can We Be Sure That Companies Live Up To These ESG Standards?

There are concerns that companies engage in greenwashing and aren’t always as ethical, socially responsible, or sustainable as we are led to believe. It is plausible that companies could try and mislead people about their credentials and accomplishments to make the grade.

One problem is that investment firms that offer ESG investment options tend to do so with their own priorities and criteria. Not only does this lead to a difference of opinion between companies, but the lack of standardization could let some questionable companies slip through the gaps. Some company rules are also vague and open to interpretation.

What to Look for When Researching ESG Investments

Let’s say you want to invest in companies that make efforts to reduce waste, lower emissions, limit chemicals, and use renewable energy. 

One major thing to keep an eye out for are clear figures. Any company can promise to try and lower its carbon footprint, reduce plastic use, and bring in more solar energy. If they do so by 1% then they technically achieve that promise. But, that doesn’t make them that ethical or appealing to green-minded investors.

Another thing to watch out for is vague claims or guidelines. If a company claimed they “won’t include anyone involved in recent or major controversies over environmental issues or animal welfare” – what do major and recent really mean? 

This ambiguity means that investors could assume that a company has a great record as an ESG option when this isn’t the case. 

You can follow many of the same steps in identifying greenwashing either as a consumer or a business owner, when looking for sustainable investment options. 

• How to Identify and Avoid Greenwashing as a Consumer
• Avoid Greenwashing as a Sustainable Business Owner or Employee

This is why it is such a good idea to conduct your own research on a company’s policies and failings before committing to an investment.

Is Environmental, Social, and Governance Investing Worth It?

There are some clear pros and cons to this approach, and it is important to be aware of this before making any major decisions with your finances. 

Disadvantages to ESG Investments

• There is no guarantee that any of these ESG investments will be profitable, as is the case with all investments. 
• A lot of ESG investments trade at a high price, so there are high costs in the short term.
• There is always a risk of companies being dishonest about their credentials.

The Upside to ESG Investments

While this sounds scary, there are plenty of positives. 

• You might come across an investment opportunity that grows with time and eventually becomes a major player. Those that are truly green and play their part could theoretically become industry leaders in time. 
• There is peace of mind of knowing that you picked an ethical company to support rather than one known to harm the environment. 
• You may also be ahead of a trend if ESG investing continues to build momentum

You’ll have to do your research to find the right balance you’re comfortable with between investment outlook, risk, and company sustainability.

How Can You Invest In ESG Options?

The first hurdle comes in knowing which investment to opt for. A good starting point if available is the MSCI rating scheme. This covers over 8,500 companies worldwide and grades them on the same standards. This means you can see how they perform against each other and which may be the ideal option for your investment portfolio.

From there, you can decide where you want to manage your investments. 

• Go it alone with an investing app or online platform
• Talk to your investment broker about setting up your investment with your choice. They can help set you up with the right ESG fund that meets your principles.

ESG Investments Could Be The Way Forward For Green-Minded Investors

The environmental implications of investing in an ESG fund are significant, even if there are transparency issues. Improvements to visibility and global ranking system can help separate eco-friendly companies from those who choose to greenwash. You can have greater confidence you are backing someone that truly cares about the future of the planet.

This is not intended to be investing advice. Please do not make any investment decisions based on this content. Do your own research and consult with the necessary investment experts before making financial decisions.