Kill 2 Birds with 1 Stone Using ESG Investment Strategy | Personal finance

(Stefon Walters)

ESG investing, sometimes referred to as socially responsible or sustainable investing, has become increasingly popular over the years. ESG stands for environmental, social and corporate governance and is used to help investors look at companies through a different lens.

Traditionally, what mattered most was a company’s financial performance, but ESG investments look beyond. This is not to say that ESG investors ignore financial performance entirely, but they are not alone factor used to make investment decisions.

ESG metrics

The environmental aspect of ESG focuses on the environmental impact of a company with an emphasis on its role in climate change, not only with its current operations, but also with its commitment to operate in a greener way. future. This metric is particularly useful when looking at energy-intensive or polluting companies.

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If you are considering a company as a potential investment, you should also want to know how it interacts with the company. This is where the social aspect of ESG comes into play. It focuses on how a company treats its employees and customers, as well as its involvement in local communities. Problems can include worker conditions, diversity and inclusion, data privacy, and philanthropy.

Corporate governance examines how a business is run. As an investor, you should want your businesses to be honest, transparent, compliant, and generally run with integrity. There have been many instances where a company appears to thrive from the outside, but inside it is pure chaos, leaving investors unknowingly on a sinking ship. Hopefully ESG will help avoid these cases.

Image source: Getty Images

Using ESG metrics to find risks

An important thing to note about ESG metrics is that investors should primarily use them to measure the risks of a company’s business. For example, an energy company profiting from fossil fuels would be susceptible to growing climate change regulations; a sensitive data company could suffer costly consequences from a data breach; and a company that deceives investors with inaccurate financial statements could cause irreversible damage to its reputation.

You may not personally care about a certain aspect of ESG, but if it affects a company’s long-term success, you should at least be aware of it.

ESG assessments

Unfortunately, no universal ESG rating system is used across all stocks and funds, and you will find that some systems place a different weight on each of the three different aspects of ESG investing. Some may prioritize one metric over the others, while others focus solely on specific metrics. This is why when you are looking to invest in an ESG fund, it is important to read the objective of the fund and how the companies have been selected to ensure it is in line with the particular issue that interests you.

The MSCI ESG Score is one of the most popular ESG rating systems and uses the following ratings (worst to best):

Companies in the CCC / B range are considered to be more exposed to ESG risks, those in the BB-A range are average, and those in the AA / AAA range are considered ESG leaders (a stock less than a quarter of companies receive ).

Kill two birds with one stone

Focusing on sustainable investing is a good thing and should be encouraged. However, it is also important to use ESG information as a supplement to traditional investment wisdom, not as the sole deciding factor. You don’t want to make reckless investments in companies just because they are performing well on the ESG scale, this goes against the purpose of the investment, which is to make money.

Fortunately, many large companies perform well on the ESG scale, allowing you to kill two birds with one stone. Investing ethically and in ways that align with your values ​​while making money is a win-win for everyone.

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