As with ethical and sustainable investing, the companies you invest in have been picked because they share a common theme: either they make some sort of positive impact or they avoid making a negative one. The difference with ESG investing is that it’s not quite so black and white.
Whereas ethical investing tends to be about avoiding the baddies – weapons, tobacco, animal testing – and sustainable or impact investing tends to be about supporting the goodies – wind farms, clean water and so on – ESG investing is about the full spectrum in between.
The ‘E’, ‘S’ and ‘G’ (Environmental, Social, Governance) refer to three sets of criteria used by a fund manager’s team of analysts to determine whether a company is worth backing.
They will probe and ask questions like ‘What is the environmental impact of this company?’, ‘What are the potential risks and rewards for society?’, and ‘Is the company governed by competent, law-abiding leadership?’. If the analysts find satisfactory answers, they might add the company to an investment fund so you can invest your money. Or they might invest but with certain conditions, such as: start being more transparent with your numbers, improve the conditions for your employees, and make sure your entire supply chain is following these principles too.
ESG is not just about investing in companies that try to make the world a better place in their own way. It’s important to remember that just because you’re investing to do good, you’re still investing to make money.
It’s not true that you have to sacrifice good investment returns for good karma (here’s the proof). If anything, investing this way could be a smarter long-term move. The companies which survive into the future will likely be the ones that already have a long-term, sustainable mindset; that consider both the risks and rewards of a rapidly changing world; that have the support of investors and consumers who believe in what they do and why they do it.
Not every company can tick every E, S and G box – some may be shining examples of managing their carbon footprint (ticking the E box), but at the same time pay their executives far too much (failing to tick the G box). So it’s up to you to decide which matters most to you, and then to pick investments that are in line with your values.
For example, if you mostly care about the Environment, you could invest in one of the many climate change funds. If you care mostly about Social issues, you could invest in a fund full of companies that win employment awards or are vocal about inclusivity and diversity.
If you don’t have a preference of E, S or G and just want to quickly pick a decent investment that isn’t destroying the world, here are 6 funds picked by the experts. Plus, a growing number of investment platforms have some sort of ethical or ESG filter on their fund lists now, so check to see if yours does.
Investing this way – in line with environmental, social and governance guidelines – is one of the most powerful things you as an individual can do to steer the world back in the right direction. Before it’s too late.
Sure, you can recycle the plastic your cauliflower came in, but to influence the world’s biggest companies so they act more responsibly has a much, much bigger impact. After all, money makes the world go round. Where are you putting yours?
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