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Everything You Need to Know About ESG (Environmental, Social & Governance) Investing

Everything You Need to Know About ESG (Environmental, Social & Governance) Investing

ESG is an acronym for Environment, Social, and Governance used in selecting strategies for companies or funds to invest in. The scheme was formed as a natural spin-off for Corporate Social Responsibility (CRS) and has been on the rise with growing regulatory rules, especially environmental policies. ESG investments are different from socially responsible investments, which are focused on ethical consideration, and sustainable impact investments, which aim at positive impacts differentiated from financial goals. 

How Does ESG Investing Work?

ESG creates an opportunity to invest in companies with high environmental and social responsibility scores determined by third-party research groups and independent companies. The scheme aims to make people better investors. 

However, the investment is impacted by environmental, social, and governance strategies aiming at companies' performance. ESG factors create a holistic understanding of the companies to aid investors in reducing risks and exploring opportunities. 

Here is a closer look at the three criteria used to scrutinize an ESG company.

  • Environment. The impact of a company on the environment, such as toxic chemicals, company blueprint, and sustainable effort.

  • Social. The company's impact on the broader community includes LGBTQ+ equality, racial aim in staff and executives, and company hiring programs and processes. It also examines a company's motive for social good aside from its work sphere.

  • Governance. The impact of the company’s board and management toward positive change. These aspects include everything about executive or leadership pay and response and the method of communication.

The investment is not limited to the company’s business sphere but includes communities, shareholders, customers, and the environment. The impact is classified as positive or negative and is used to determine the risk of the investment. It is important to stakeholders and determines the business's strength and sustainability. Companies that can balance the five core criteria have good stocks and gain more investors worldwide.

Types of ESG investments

There are various ESG investments, but we’ll only address the two popular ones. You can research for others.

ESG stocks

Limiting your investment portfolio to individual stocks is proper, but if the company is trustworthy, you can decide to buy its stock. You can request a company’s impact report to explore the sustainable or cultural impact implemented by the company in handling problems such as carbon emissions. Some companies lack this highlight, but you can still research their score through a third-party site like Glassdoor. You can also consider crucial factors like revenue and net income.

ESG mutual funds

Mutual funds are quick to fill and help divide your investment instantly. Recently, the economy has implemented different types of mutual funds, which have rounded up to 303 open-end and exchange-traded funds. These funds are associated with specific issues such as green energy. 


ESG investing:

ESG investing has higher returns

These funds have gone head to head with traditional funds analyzed under Morgan Stanley Institute for Sustainable Investing. The result concluded that from 2004 to 2018, the gains from ESG equaled the traditional investment. Other studies place ESG investments above conventional ones.

ESG investing has a low risk

The same studies observed a low risk associated with ESG funds. The benefit was observed during the 2008, 2009, 2015, and 2018 market crises, dragging down convention funds while ESG funds maintained a lower loss.



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