When people think of investing, the first thought that comes to mind is “profit.” At a time when the world’s resources are becoming scarce and major corporations have a lasting impact on the planet as we know it, supporting the right brands can be a good thing. This is the main concept behind ESG.
If all this is new to you, here’s an ESG primer to help get you started.
What Is ESG Investing?
This stands for environmental, social, and governance investing. This is a set of standards based on a company’s behavior. The goal is to help socially conscious and responsible investors find investment opportunities. Each of the criteria stands for a set number of standards that companies are expected to abide by.
Environmental refers to how a company can safeguard the environment. This includes providing corporate policies that address climate change. Let’s take a look at Nike for instance. As one of the top producers of shoes and streetwear, Nike’s factories and need for goods could have a lasting impact on the environment.
To lessen their impact, Nike has improved their environmental initiatives by eliminating waste safely. They have also shifted to using recycled products.
Social pertains to how a brand manages its relationships with its workers, customers, and the community where it operates.
One of the most common examples of companies that have a high social rating is those that promote diversity and equality in the workplace. In this day and age, brands are expected to treat all people equally regardless of race or gender.
Last is governance, which refers to how a company deals with its internal aspects such as leadership, audits, and even shareholder rights. Governance may also include having better diversity and integrity concerning choosing corporate leadership.
In this regard, corporate leaders are expected to act with decency and integrity. This means not using their position to abuse fellow employees, or even to get preferential treatment from governing bodies.
ESG Criteria Defined
ESG criteria simply refer to the set standards that an investor or an investment firm uses to see potential investments. Now, there’s no universal bar that defines what the criteria are. Investment firms have different priorities when it comes to the ESG criteria, as do individual investors.
These are how companies are typically rated:
- Carbon emissions
- Proper waste management
- Sustainable sourcing of raw materials
- Biodiversity and land management
- Use of renewable energy
- Impact of environmental footprint
- Makes use of ethical supply chains
- Supports racial and LGBTQ+ rights
- Steps towards office misconduct and sexual harassment
- Pay grade and benefits of employees
- Provisions for workplace safety and labor
- Diversity of board members
- Transparency of corporate reports
- History and background of corporate leaders
These are all subject to change depending on the firm or the private investor. There are some firms that choose to focus more on specific environmental issues. There are others that prefer social aspects as well. Investment firms can change their ESG criteria from time to time.
The rise of the LGBTQ+ community, for instance, has sparked more interest in their equal treatment inside major corporations over the last couple of years. Then a few years back, investment firms were mainly focused on the steps companies take toward carbon emissions.
Pros Of ESG Investing
There are quite a few pros to ESG investing. For starters, using the ESG criteria can help you avoid potential crashes when companies become guilty of unethical actions and are held liable for their consequences. A good example of this was when Volkswagen got caught up in the emissions scandal in 2015. This rocked the company’s stock and made them lose billions.
This makes high-ESG rating companies a good low-risk choice for long-term investments. Businesses that abide by ethical actions have better stability over time. As more people start to look towards the unseen future, they’re most likely to support brands that promote sustainability and equality above anything else.
ESG companies are also expected to perform better even during downtrends. The reason for this is that these companies have better operational costs and practices. These results in better investor insight, therefore giving them better footing during turbulent times.
For many, the biggest benefit of ESG investing is that it helps them support brands that fight for sustainability and ethical behavior.
Cons of ESG Investing
In reality, the only downside to ESG investing is that it greatly limits your portfolio. The amount of socially-responsible companies is increasing but they’re still a relatively small population compared to those that don’t take steps towards better ESG.
As you limit your portfolio to specific brands, you might miss out on potential gains as well. Many investors are okay with the trade-off though. While the majority of investors buy stocks to increase their wealth, there are some that want to do so without sacrificing their beliefs.
Brands With High ESG Scores
While your choices are limited, that doesn’t mean that you don’t have access to the big names. In fact, you’ll be surprised by how many of the big brands have high ratings. Some of the companies with high ESG scores as per Yahoo! Finance include:
- PepsiCo, Inc. (NASDAQ:PEP)
- Cisco Systems Inc. (NASDAQ:CSCO)
- NVIDIA Corporation (NASDAQ:NVDA)
- PayPal Holdings Inc. (NASDAQ:PYPL)
- Apple Inc (NASDAQ:AAPL)
How Can You Do ESG Investing?
Investment firms typically have access to a portfolio of companies that fit their criteria. The good news is that ESG ratings for most companies are readily available online. This means you can create your own portfolio depending on what companies you share values with.
Is ESG Investing For You?
The answer depends on a few questions.
Are you okay with long-term drivers? ESG companies are not usually expected to deliver immediate performance. However, they’re pretty much a solid choice when it comes to long-term potential.
Are you willing to lock yourself behind a wider portfolio of companies to support socially responsible companies? If you answer yes, then ESG investing is a great way to add low-risk stocks to your portfolio. Don’t let the limited selection of stocks fool you, combining your investments with your values can be a lucrative idea in itself.
May this ESG primer help you out in the future!