Environmental, social, and governance investing, or ESG, is a strategy growing in popularity for investors. ESG allows investors to support companies that are making a positive impact on the world, putting their wealth to work for the betterment of society. But why choose ESG over other investment options? This article will break down the basics of ESG as an investing strategy to help you make well-informed investment decisions.
How Did ESG Start?
While it may not have been referred to as ESG, socially responsible investing is not a new concept by any means. People have been using their religious and ethical beliefs to guide their investments for years. However, in recent years, corporate responsibility has become a hot topic. More and more companies are trying to reduce their carbon footprint, invest in people in need, and overall promote positive change. Companies are trying to improve the impact of both their business practices and the money they invest. Especially in light of the pandemic, while the economy has made the stock market, unpredictable ESG funds are more resilient.
What Topics Fall Under ESG?
As mentioned initially, ESG stands for environmental, social, and governance. But those are broad terms; what do they actually mean? There are a variety of topics that fall under these broad categories. A few examples are climate change, energy efficiency, biodiversity, working conditions, human rights, and business ethics. If you think ESG isn’t relevant to your business operations, think again! Do some research to see what ESG topics might be relevant to your specific industry or geographical area.
How Does ESG work?
ESG investing is when investors choose to invest in companies that score high on environmental and social responsibility scales as measured by third parties. Overall, these scales strive to measure how companies serve their stakeholders, from employees to the environment. These scores can say a lot about a company’s sustainability, especially since younger generations are more likely to work for and purchase from socially responsible companies.
When engaging in ESG investing, most investors will choose to focus on companies or issues that align with their personal values. They tend to be more personally invested in these transactions than in more traditional investments.
If you are interested in doing some ESG investing, do your research and find ESG stocks with good ratings that align with your ethics! It’s essential to make sure you cover a variety of industries, though; even ESG investments should be varied to decrease risk.