ESG investing is becoming popular as awareness grows about the impact of corporate actions on the environment, society, and governance. This article will look at how ESG Investing works and some of the benefits and drawbacks of this growing movement. What should you consider when including this type of investment in your portfolio?
What are the essential characteristics of an ESG investment strategy?
Many factors make up an ESG investment strategy. For a company to be an ESG investment, there must be exposed to environmental and social aspects. Exposure to these factors can be defined by three characteristics: alignment, integration, and recognition. All three of these characteristics must be present to exhibit an entire ESG investment strategy. By adopting one or more of these strategies, they can better prepare themselves in times of need. It is much easier to come back from challenging situations when you are ready. It takes careful planning, diligence, and perseverance to fully adopt an ESG investment strategy. However, if done correctly, these practices will strengthen your company and increase its value over time and preserve its reputation within its community.
How do I make sure my fund managers follow an ethical approach?
The first and most basic way to make sure your fund managers take ESG into account is to ask them. As with any other question, you should call them up and ask if they use sustainability metrics in their investment process. They’ll tell you, Of course, we do (which might or might not be true), and that will give you a sense of how serious they are about ESG investing. If you like what you hear and want to invest, you can trust that your money isn’t funding unethical companies. But if they seem mysterious, or worse—dismissive—then it could mean that there aren’t good incentives in place to keep fund managers accountable for their actions. That would indicate an unethical culture at your mutual fund management firm.
Why is this different from other kinds of socially responsible investing?
The social responsibility aspect of ESG investing isn’t just about environmental or social impact but may include these factors. It also aims to be financially responsible and considers an investment’s impact on other financial indicators such as price volatility, liquidity, earnings growth, operating efficiency, and capital preservation. These features are often not found in socially responsible investments as they tend to focus on issues surrounding environmental or social effects. As a result, many consider ESG to be more than just socially accountable investing — because it includes financial indicators and increased engagement with companies — while others think it is just another kind of SRI.
When did this become popular? And why should I care now?
After decades of playing second fiddle to shareholder-value investing, ESG has emerged as a star in its own right. Even though sustainability and corporate ethics are still relatively new concepts in business management, concerns about social issues have been around for thousands of years—and they show no signs of fading away. That’s why more and more investors are looking at companies through an ESG lens.
Some examples of funds in this space and their returns over time.
Newfield ESG Long/Short Fund (EQLIX), Calvert Social Investment Strategy Fund (CSLFX), Vanguard FTSE Social Index Fund ETF (VFTSX). After a rocky start, there are signs that environmentally conscious investing has been growing in popularity—more than 150 socially responsible mutual funds with $200 billion in assets under management. Still, concerns remain about what kinds of businesses these investment funds hold and their role in helping companies change their behavior to protect employees and the environment better.
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