investing
A New Type of Investing? Or Is It?
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by Sam Dreibelbis, CPA | Associate Wealth Advisor – Covenant
When researching stocks, every investor should use several criteria. Typically, items such as sales, earnings, debt, and market value are some of the key drivers to determining whether that stock is worth an investment. But, what about other factors such as the Environment, Social issues, and Governance? It’s called ESG investing. While ESG factors don’t necessarily affect the bottom line directly, more investors are using these types of criteria in their research before they commit to investing in a company. Should you?
What is ESG investing?
ESG is an investment-related decision-making process that accounts for some type of environmental, social, or governance consideration. Some investors use this method to invest in companies that fit within the ESG framework. ESG focused investors often think a performance advantage can be garnered from this. “Putting money where your values are.” Below are a few questions to consider when looking at companies through an ESG lens. Environmental: Does the company have specific policies around how they impact the environment and goals to improve this over time? Do they even measure their impact? Social: How does the company promote health, safety, and fairness in the workplace? Do they address the needs of their employees and have high retention of employees? Governance: If you’ve heard someone talk about ESG, it may put pictures of environmentalists and activists in your mind and not people looking to grow their assets for the long-term. But, there’s more most investors need to learn about this type of investing. In fact, COVID-19 in 2020 taught investors to look at the “G”, governance. How does company management align with the interest of other stakeholders (employees, customers, shareholders etc.)? Are they giving back to society, charities, etc.? That’s governance, and it’s taken center stage.
ESG investing may be thought of as a fad for millennials, environmentalists, etc., but the industry may be moving in that direction and the recent data suggests that it may be wise to diversify in this direction and get on board. The reason ESG is considered to be a fad is because most observers think ESG investing is new. But, it’s not. ESG has actually been around since the 1970s. Two Methodist ministers started Pax World to avoid investing church dollars in companies that supported the Vietnam war. However, the actual term “ESG” was coined in 2004. ESG investing has grown to more than $30 trillion dollars as of 2018 and is expected to reach $50 trillion over the next two decades according to CNBC. Three of the companies that most would recognize that are implementing ESG characteristics are Nike, Accenture, and Intuit (the maker of Turbo Tax and Quicken). Some question the performance of an ESG strategy, thinking it would be sub-par. That hasn’t been the case. In fact, many ESG specific strategies have outperformed other non-ESG strategies and investors can still build a very diversified portfolio using stocks that meet the ESG characteristics.
Ways To Invest In An ESG Focused Portfolio
There are plenty of mutual funds and exchange traded funds that focus on ESG. But, investors need
The contents of this article are provided for informational purposes only. It is not an exhaustive list and is not intended to provide any legal or tax advice. Please consult your respective legal, tax and financial advisor before taking any action.
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B oerne B usiness M onthly | July 2020
