There are many ways to be an ESG investor. It may be difficult to find investments that meet criteria across all three pillars. There are five important ways you can approach ESG investing to make the right choices for you.
1. Reflect on your values and priorities
When looking for investments that reflect your own financial priorities and values, consider what’s most important to you — for example, low carbon footprint, ethical labour practices, or equity, diversity and inclusion practices.
2. ESG investing can be a risk management strategy
The impact of evolving social and governance expectations, and climate change concerns, will likely continue to grow. ESG risks can affect a company’s long-term value for investors.
Strong corporate governance, with clear accountability and long-term goals, is better for shareholder’s interests. Weak governance can lead to a lack appropriate risk oversight. Knowing a company has strong governance, with detailed long-term planning, can increase your confidence in investing in it.
Social risks include a range of potential issues such as product safety and how workers are treated and paid. Companies that take care of their human capital can attract and retain talent better. This can lead to higher productivity which contributes to a healthier bottom line and a better return on your investment.
Environmental risks can impact insurance costs as warmer oceans increase the intensity of storms and the chances of property damage. Increasing climate change awareness has led more companies to move away from fossil fuels to manage risk exposure. There are mutual funds or exchange-traded funds (ETFs) investors can explore that screen out carbon intensive companies from their portfolios.
3. Be aware of greenwashing
What is greenwashing? Greenwashing is a term that refers to the misleading labelling of products or investments. This can happen with investing, as well as any industry that markets its products as ESG-friendly or sustainable. Despite the name, greenwashing is not just used for misrepresenting environmental impacts and risks. Greenwashing also applies to funds that mislead investors about social and governance ESG targets.
While it can be challenging to fully vet the ESG-friendliness or sustainability of all your investments, try to find information about the companies you are considering. Seeing a company’s emissions disclosures, carbon reduction targets, board diversity numbers or whether their ESG claims are supported by research can provide you with more confidence that the company meets the ESG label.
When investing in a fund that identifies itself as focused on ESG, remember to review the fund’s prospectus. In it, you will find information about the fund’s ESG-related investment objectives and strategies, such as whether the fund intends to cover all aspects of ESG or is focused on a single ESG aspect. For example, the fund may focus only on one ESG target, such as how much of it is invested in industries that rely on fossil fuels.
4. Know how much risk you can take on
Research shows that investors may be willing to accept more risk when choosing ESG-focussed investments. It’s true that every type of investment comes with an amount of risk, and ESG investing is no different. Before you invest, reflect on your risk tolerance level, your time horizon, and how ESG investments might affect your portfolio’s diversification.
5. ESG investing isn’t just a new trend
Interest in ESG investing has grown significantly in recent years. But it has been around for much longer than that. Socially responsible investing and impact investing date back to at least the 18th century. History includes many stories of investors making choices based on concerns with war and conflict, ethical trading, and specific industries such as alcohol and tobacco.
More recently, concerns over issues such as the impacts of climate change and geopolitical crises have led many current investors to put an additional focus on ESG investing opportunities.