ESG stands for Environment, Social, and Governance. It is a set of criteria that is used by socially conscious investors to screen prospective investments for ethical business practices environmentally, socially and in how organizations are run.
What is ESG Investing?
Simply put, ESG investing means investing your money in a way that is ethical and supports sustainability in a number of areas. Some considerations for ESG investing are:
1) Greenhouse gas emissions
2) Environmental impact
3) Socially responsible employment practices
4) Waste disposal practices
5) Employee treatment
6) Lobbying efforts
7) Diversity in board members
8) High Level Compensation Models
10) Ethical Sourcing
ESG investors want to be impactful in the way they invest their money. By investing in companies that align with their own values, investors hope to support the long-term success of socially conscious companies.
Why Adopt an ESG Investing Approach?
Aside from the ethical rewards of ESG investing, your portfolio could also reap some serious benefits. Ethical investing used to be viewed as tradeoff between ethics and investment returns. This is no longer the case. ESG is becoming a mainstream investment strategy and is now being associated with financially healthy companies. ESG may protect you on the downside too. ESG investing can be used as a risk management strategy to avoid the massive losses that come with corporate environmental, human rights, and corruption disasters.
ESG vs Socially Responsible Investing (SRI)
Socially responsible investing and ESG investing may sounds similar at first, but there are some key differences between the two strategies that should be noted. Socially Responsible Investing tends to be driven by personal or religious values more than overall sustainability. For example, a person that engages in socially responsible investing may be unwilling to support the tobacco or alcohol industry because they don’t believe in using substances. ESG investing is a much broader approach that is more concerned with what impact a company has, rather than the nature of the business.
The Bottom Line
ESG investing is on the rise for good reason. Investors can expect to seek reward in knowing they are supporting companies that are good citizens, all the while adding a valuable strategy to their investment portfolio.