What is ESG Investing
The concept goes by a few names, so if you haven’t heard ESG before you may have heard of socially responsible investing (SRI), or just responsible investing. It is also sometimes called green investing. Whatever the label, the concept remains the same. Its is a way to put your dollars to work in a way that can generate returns, and keep your conscience clear.
Put simply, ESG investing is an approach to investing that considered both a company’s potential for investment returns, as and its overall impact on society and the environment. To make the cut as an ESG investment a company must behave in a way that rtes positively when it comes to its interactions with the Environment, Social factors, and its corporate Governance…ESG.
Aside from aligning your investment goals with your moral compass, there is some evidence to suggest that ESG investing can generate similar returns to the market, while potentially carrying less risk.
A study done by the Morgan Stanley Institute for Sustainable Investing found that from 2004-2018 returns for sustainable indexes were solar to those of traditional funds. It also found that in periods of market volatility like 2008-09, 2015, and 2018, ESG funds had noticeably less downside deviation (plain English that means they had lower potential for loss). Keep in mind historical returns are not necessarily predictors of future returns, but the growing evidence would suggest that you don’t lose much by way of investment returns by choosing an ESG approach.
There are many different ETFs and mutual funds that are an easy way to get started in ESG investing. Be aware though that ESG investing is not a pure black and white science. There is no list of companies that are model citizens and there is a lot of murky water around what makes a company fit the bill to qualify.
Take for instance a company run by a diverse board of directors, who pays their employees fair wages. They manufacture solar panels, but they source their materials from an African Country undergoing civil war.
Or a company that manufactures assault rifles using only ethically sourced materials.
It’s not as easy as you might think to divide every company into two sides, ESG or non ESG. There can be a lot of overlap, and sometimes you have to accept the lesser of two evils.
If you want to make sure your portfolio aligns to your moral compass, you will need to take time to research each fund, and in some cases the companies inside of them. If spending that time diving into data doesn’t sound fun, give us a call. Balanced Capital can help you quickly navigate the weeds and align your funds to fit your goals without you having to put through the research.