ESG Passive Investing Strategies That You Should Consider

Written By Decent Investor  |  Uncategorized  |  0 Comments

Don’t be fooled into thinking that ESG companies aren’t good for your health. ESG stocks are a great option if you’re looking for long-term returns. Companies that have a high ESG rating are more stable options making them a great find for passive investing.

If this is your first foray into ESG passive investing, your biggest mistake would be to treat it as you would a regular investment portfolio. Here are a few strategies that will help you see better returns in the future.

Develop Your Criteria

Developing a criterion for your ESG rating should be one of the initial steps you need to take. If you’re having your funds diversified through a broker or an investment firm, then you’ll have your work cut out for you. Most investment firms set up their ESG rating criteria and they’re transparent about it.

There are a few things to consider when developing your own.

Since you’re becoming a socially responsible investor, you’ll need to define what your values are. Are you looking for brands that practice sustainable means to develop their products? Do you want to focus on brands that aim for fair and equal workplace treatment?

A good way to go about this is by creating a checklist of standards for the environment, social, and government pillars.

For example, in the environment, a company should have a plan to reduce their carbon emissions, have a percentage of their operations be powered by renewable sources, etc.

If you’re finding it difficult to do so, you can look towards financial institutions like S&P Global, Moody’s Sustainalytics, and more. They’ve created their ratings and this can be helpful.

Don’t Treat It Differently

At the end of the day, ESG investing is just like stock investing but with your values involved. There’s no reason to treat it any differently aside from basing your investments on the ESG criteria.

If you think that a company is no longer supporting the same views as you, don’t be afraid to pull out immediately. Bear in mind that in ESG investing, companies can suffer heavily from scandals and societal issues. You must always be up-to-date on a company’s recent news.

Transparency Is A Must

The governance aspect of ESG does include how well a company manages its internal affairs, including how transparent they are to stockholders. Financial reports are the base of good communication between companies and their investors. With that, a company should be very transparent about anything that relates to its practices and performance.

Stockholder activism is more common today. Investors aren’t afraid to reshape how a company operates through their votes. Look at how satisfied stockholders are with a company and this can tell you a lot of things about the potential investment.

Positive/Negative Screening

Although ESG gives you a smaller pool of stocks to choose from, there are still a lot of companies that can fit the bill. You might be overwhelmed by the number of choices so it’s best to whittle it down through a screening process.

Positive screening refers to selecting companies that fit your criteria of having a good ESG rating. On the other hand, negative screening is the complete opposite. It seems you are excluding companies from your portfolio if they don’t fit your criteria.

This is a good way to start your ESG passive investing as it will help you narrow down your choices, thus letting you create a lucrative portfolio.

Evaluate Each Industry Differently

How a company follows the ESG standards is affected by the industry they are in. Those in the manufacturing industry, for example, should have more focus on their plans for the environment. 

As an investor, make sure that you set different ESG standards depending on what industry you are eyeing to invest in. This can help you find companies that employ the best practices.

Plan For Long-Term

ESG stocks are generally long-term investments. The good news is that they are more stable even during turbulent markets. Stocks with high ESG ratings have more sustainable practices, meaning they’re efficient during what could be downtrends for other markets.

As for growth potential, ESG stocks aren’t expected to soar hundreds of percent in a few years. However, experts still believe that there’s good room for growth regardless.

Watch Out For Trends

You can capitalize on potential good returns by looking for trends. Over the last couple of years, various industries have been encouraged to take more action when it comes to supporting diversity and equal opportunities for women.

Aside from these two social issues, the push for climate change is still very strong. By looking for companies that provide solutions to these problems, you can create a diverse and low-risk portfolio immediately. Trends come and go very quickly so don’t forget to stay in the loop.

ESG Involves A LOT Of Research

As a general rule of thumb, you should always heavily research the companies that you’re going to invest in. Whatever research you do for those stocks, you need to do even more when it comes to ESG.

Apart from their current CSR plans, you should also look at the company’s past history of practices and their tendencies regarding various societal issues. You should also take time to research the board members and see if any of them are guilty of unethical practices.

Though it’s still performance, a company’s financial performance is one of the least intensive aspects you need to search about. What’s important is to find a brand that fits your needs.

Invest In What You Care For

Ultimately, ESG passive investing is about aligning your investments with your values. Aside from looking for long-term and fruitful companies to add to your portfolio, don’t forget to invest in what matters to you as well.