Most investors — whether they’re buying stocks, bonds, real estate, or business equity — share the same goal: maximizing returns. What distinguishes one investor from another is the strategy they use to pursue that goal.
In a world characterized by widespread uncertainty, wealth inequality, and climate change concerns, one investment approach has exploded in popularity. Environmental, social, and corporate governance (ESG) investing refers to strategies that incorporate the aforementioned variables instead of relying solely on traditional financial performance metrics.
That last part is key. In a time when social unrest is rampant, where we choose to spend our money is still an efficient and effective way to inspire change. Netflix, for example, recently announced it plans to invest $100 million in Black-owned financial institutions as a show of its support to that community.
A common misconception about ESG investing is that it’s primarily concerned with social impact, which is often a byproduct of these types of strategies rather than the main objective. ESG investors believe that by accounting for a broader set of elements in their fundamental analysis of a stock or fund, they can reduce risk and possibly achieve better returns.
Creating Wealth and Changing the World
While money managers have differing opinions regarding the profitability of ESG compared with other investment strategies, there’s no denying the magnitude of its secondary impact.
ESG investors often reward companies that act as good corporate citizens and punish those that do not. For example, “positive screening” or “issue-specific” ESG investment strategies focus on companies that excel in specific areas such as racial equality, gender equality, or climate change. Conversely, investors implementing “negative screening” strategies seek to avoid investing in certain businesses, industries, sectors, or business models (e.g., fossil fuel production, tobacco, weapons manufacturing, or payday lending) that conflict with their values. “Best in class” strategies allocate capital to the companies in each sector that score highest on certain ESG metrics, according to data providers such as MSCI, Sustainalytics, and Bloomberg.
As these and other ESG strategies continue to gain prominence, businesses should take notice — and many already have. In recent years, a growing number of companies have worked to adopt sustainable business models, incorporate social causes into their core objectives, and adhere to good governance practices to benefit from a lower cost of capital.
Furthermore, ESG investment managers often engage with the executive teams and boards of companies in which they invest, typically through shareholder proposals. They might use their influence to push these companies toward better managing social and environmental risks and opportunities — or to promote the adoption of practices that better match shareholders’ values.
Joining the Movement
Thanks to an abundance of ESG financial products, everyone from veteran money managers to novice investors can deploy capital using ESG strategies. If you’re interested in applying these strategies to your investments, here’s how you can get started.
1. Be clear about what matters to you. Develop a list of companies, industries, sectors, and business models that are appealing or unappealing to you based on your values. If certain environmental or social causes matter to you, make a note of those and begin identifying businesses that appear to be aligned or misaligned with your position on those issues. Resources like Climate Counts and the Buyer’s Guide to Corporate Equality, developed by the Human Rights Campaign, can help you see exactly where certain companies stand concerning prominent environmental and social causes. A financial advisor who specializes in ESG investing can also be a great resource.
2. Determine your risk tolerance. Financial advisors will typically ask you to complete a personal risk assessment before assembling your portfolio. You can also conduct this exercise independently. Investing is an inherently risky endeavor, but a thoughtful plan should help you grow your wealth over time. Consider your current financial situation while setting investment goals to determine which financial products make the most sense for you.
3. Analyze your current holdings. Tell your financial advisor that you’re interested in ESG strategies, explaining the types of investments you want to avoid as well as those that most align with your values. If you don’t have an advisor — or if you prefer to manage your investments independently — you can use a service like As You Sow to assess your portfolio based on numerous ESG metrics.
ESG is just one of countless investing strategies that you can deploy. However, it’s one of the few approaches that considers the dual objective of maximizing returns and influencing positive change through the allocation of capital. As its popularity continues to grow, so will its impact on society and our world.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article do not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and they are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future; there are no assurances that any predicted results will actually occur.