What In The World Is It?
ESG. What Is It and How Do I Start Investing in It?
You may have heard about ESGs before. Maybe you’re wondering what is ESG investing and if you’re missing out on something.
A lot of our clients live, work and play in places, jobs and activities that require community engagement. Environmental, Social, and Governance Criteria (ESG) investing is a way of expressing one’s values through their investment monies. Essentially, it’s a set of policies which promote and support specific goals.
Let us explain:
Environmental Criteria looks at how a company performs as a steward of the natural environment.
Social Criteria examines how a company manages relationships with its employees, suppliers, customers, and the communities where it operates.
Governance Criteria is a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
“Although many ESG promoted investments focus on one criterion or another, most times the criteria are simply intended to identify companies that give a crap about ESG issues.”Michael Menzies
Now that we’ve covered what ESG is, and how they’re identified, let’s take a look at it in more detail.
Then we can talk about how you can invest using ESG screens. (Don’t worry we’ll explain what that is too!)
The most common ESG focused investments are looking to understand business ethics, sustainable practices, and social responsibility investing. Some of the things that they look at include determining a company’s impact on climate change, carbon emissions, water use, conservation efforts, anti-corruption policies, board diversity, human rights efforts, and community development. Yes, we know, all things we should all be looking at and caring about in a business already. But we digress.
There are many ways to to invest in ESG. One of the easiest is to use low cost mutual funds and exchange-traded funds. According to the U.S. SIF Foundation, the value of ESG funds totaled more than $2.5 trillion by the end of 2016, while U.S. investments in companies that actively pursue responsible, sustainable growth accounted for about $8.7 trillion in assets management at the end of 2015.
An acceptable ESG criteria to you, may be different from someone else. And since ESG investing is a varying topic, the branding of ESG can be pretty subjective. The key is to find investments that match your values. A good place to start when looking into ESG standards is to look at, well, the standards.
Let’s look at some of the criteria we use for ESG investing.
For Environmental criteria we look at a company’s energy use, waste, pollution, natural resource conservation, and animal treatment. They also evaluate the possible environmental risks that might affect a company’s income and then it looks at how the company manages those risks.
For Social criteria we look at a company’s business relationships. How does it work with suppliers? Does it donate a percentage of its profits to the community? How are the company’s work conditions and do they show a high regard for its employees’ health and safety?
With regard to governance, we look at how a company uses accurate and transparent accounting methods and we want to see that common stockholders are allowed to vote on important issues. They also want a company to avoid conflicts of interest when choosing board members and they prefer not to invest in companies that engage in illegal behavior or use political contributions to obtain favorable treatment.
Large investment houses have realized the demand for ESG investing and have now begun to publish reports that review their ESG approaches.
Now, hopefully, you know a bit more about ESG.
And if you are ready to make an investment in ESG you can make a purchase in your brokerage account pretty easily.