Investing according to environmental, social, and governance (ESG) criteria is one of the fastest-growing segments across the spectrum of financial products. The Forum for Sustainable and Responsible Investment reports that sustainably invested assets now represent 33% of the $51.4 trillion in total U.S. assets under professional management.1
The rapid growth in ESG products makes them increasingly easier to deploy in investment portfolios. It also helps ensure that your values can be expressed in a way that helps you meet your financial goals.
Along the way, these strategies are creating change and can make your money a force for good.
Breaking Down the Acronym
There are three components to ESG. The first two are usually most important to an individual investor, as they connect most directly to values. The third one plays a role for institutional investors, under the theory that these principles can make the company better, translating into improved financial performance.
Is the company an active participant in helping to support sustainability? Companies that support the move away from fossil fuels are obvious examples. But the question is more about the impact of a business on the environment. This can include everything from carbon footprint, toxic chemicals involved in manufacturing processes, and even how the supply chain is managed.
What is the social impact upon the broader community? Companies that embrace diversity and work towards equality in all spheres – even to becoming advocates for social good beyond their hiring practices – are becoming the standard. Over the last year, we’ve seen that companies that take a social stand are rewarded, even if just in reputation.
How is a company run and managed? This includes everything from executive pay to diversity in leadership and how responsive a company is to its shareholders. Transparency, privacy issues, data security, etc., all come into play when looking at the governance of a business.
Investing in Growth
A recent report from the Organization for Economic Co-operation and Development found that combining climate and pro-growth reforms would result in a long-run economic boost of 2.5% across the G20 in 2050, rising to 4.6 % when avoided economic damages from climate change are included.2
In the United States, fighting climate change is a pillar of the current proposed infrastructure plan and includes investment across numerous industries. The objective is to help meet 2030 climate goals and rebuild critical pieces of infrastructure while boosting the economy. The plan will go through changes as it works through the legislative process; however, the likelihood of it passing in some form is reasonably high.
Incorporating ESG into Your Daily Life
Incorporating your values into your daily life is easier now than it has ever been. One of the measurements for a company’s commitment to ESG is whether the company is a Certified B Corporation. These corporations meet the highest standards of verified social and environmental performance, public transparency and legal accountability. They work diligently toward maintaining these standards to balance profit and purpose.
But your actions are not limited to how you invest – you can use your power as a consumer to shift your buying patterns to make a difference. On your next trip to the supermarket, look at the packaging of the products you buy. Many of them will display the B-Corp symbol. And for those that don’t, there’s probably an alternative that does.
The Bottom Line
ESG has moved well into the mainstream and offers products and strategies that can work for your values while also working towards your financial goals. No matter what stage you’re at in your financial journey, incorporating ESG investing can be a long-term strategy and provide opportunities as we enter a historical phase of rebuilding both the economy and our country.
Being selective and intentional about the products you buy can also make a big difference on the home front.
1. Nason, Deborah. ‘Sustainable Investing’ Is Surging, Accounting For 33% Of Total U.S. Assets Under Management. CNBC. December 21, 2020.
2. Investing in Climate, Investing in Growth. Organization for Economic Co-Operation and Development. May 23, 2017.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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