Investing is a big deal especially if you’re a newcomer. For tried and tested investors and newbies, diving into ethical investing can be a daunting task. If this is something that you’re interested in, then you might want to continue reading to understand the impact investing basics everyone should know.
To make the list simple, we’re listing down the do’s and don’ts of impact investing. By the end of this piece, you’ll be able to make even better investment decisions for your chosen ESG stocks or ethical funds.
Do Research Before Making Any Move
Research is vital for any form of investing but when it comes to impact investing, it’s extra important. You’re not just looking for brands that are good performers on the stock market, you’re also looking at brands that are doing good.
Luckily, doing research on ethical investments is easy. There are lots of sources that review and measure a company’s ESG rating. Taking a few more steps when it comes to research will allow you to find brands that are fully ethical and are great performers on the market as well.
Some of the top ESG raters out there are Bloomberg ESG Disclosures Scores, Bloomberg ESG Disclosures Scores, CDP Climate, Water and Forest Scores, S&P Global ESG Score, and Moody’s ESG Solutions Group.
Don’t Put All Your Eggs In One Basket
This is a don’t that every investor should follow. Bear in mind that ESG stocks aren’t usually considered drivers for wealth. At the very least, ESG stocks and ethical investments are long-term funds that are safe to invest in. While this is the case, it’s not highly recommended to go all-out on ESG stocks.
Furthermore, it can be tempting to invest a lot of money into one brand that has a high ESG rating but that’s not something you want to do. Like all companies, high ESG companies are still susceptible to bear markets and changing trends.
Do Get Regular Updates
One of the driving factors that can determine the performance of a company from the view of an impact investor is its business decisions. It’s very important that you always keep yourself updated when it comes to the latest news surrounding your supported companies. Doing this helps you out in many ways.
Keep in mind that companies suffer a lot financially if they become the center of controversy. Take a look at the Volkswagen emissions scandal or Emissionsgate for instance. It was discovered in 2015 that the carmaker programmed its turbocharged direct injection diesel engines to work during lab emissions tests only. This meant that outside the lab, Volkswagen vehicles did serious damage to the environment.
The scandal caused Volkswagen to lose millions due to investors pulling out, as well as sanctions from the government. If you were investing in Volkswagen because of its good ESG rating at the time, then you would’ve lost a great deal if you didn’t jump ship early.
Regularly updating yourself on the brands will also let you know whether they are still sticking to their CSR goals and adding new ones at the same time.
Don’t Invest What You Can’t Afford To Lose
This is another tip that all investors can use as well. Whatever, you do, don’t invest money that will financially cripple you if it gets lost. While companies with high ESG ratings are typically safe choices, they’re still not safe from the effects of bear markets, as well as scandals or poor business decisions.
Most investors will tell you that you should invest around 15% to 25% of your post-tax income. Investing is NOT gambling so be very wise and careful with the amount that you invest.
Do Look Into A Company’s Corporate Structure
A company’s corporate structure is also an important aspect to consider if you want to start to impact investing. The G in ESG stands for governance and this pertains to the steps that a company takes in ensuring that its ran by the right people.
For starters, it’s a big deal that a company’s corporate structure is diverse. The company should be run by people who are both competent and free from scandals in the past. It might not seem like a big deal for many but impact investors don’t like corporate leaders who don’t have ethical practices.
The good news is that a company’s corporate structure is always viewable online. You can go from there and start heavily researching each of the company heads.
Don’t Think That Impact Investing Is Limiting
A common misconception when it comes to impact investing is that it greatly limits the number of companies that you can invest in. However, that’s not all true. In fact, there are a lot of big names that have high ESG scores. Those include brands like Apple, Nike, Google, and a lot more.
Big companies are constantly under pressure to implement more sustainable practices. As such, you have a wider selection of companies to invest in even if you’re basing your buys on ESG criteria.
Do Consider Hiring A Broker
Hiring a broker or a firm to do your investments for you isn’t a bad thing. In fact, a lot of investors today resort to hiring brokers to better invest their wealth. Most investment firms today also have their own set of ESG criteria to abide by. This means that you can still partake in impact investing even if other companies do the job for you.
What’s good about hiring a broker is that it helps you dive into impact investing even if you’re a newcomer. The risks are still there.
Only invest your money through brokers who are already established and tested. There are lots of individuals posing as brokers but these could be scammers preying on the common investor.
Bottomline
While generally seen as a smart way to invest your money, impact investments can still go both ways if you aren’t careful. These helpful do’s and don’ts can lessen the risks that you can encounter while investing. Of course, these will also help you find the right companies to invest on.