Do you want to invest but fear the only ways to earn a decent return could involve your conscience screaming in your head at night while you try to sleep? Alright, that might be a little dramatic, but you can invest and still prioritize your values. Socially responsible investing, Environmental, Social, and Governance (ESG), or value-based investing has been gaining traction as a viable option for the good of the world, your values and your returns.
What Is ESG Investing?
Investing with an eye to social responsibility means looking for companies with a societal impact and operating sustainably. This could involve having a small carbon footprint or diversity in leadership.
These are enterprises that benefit the environment, taking into account the social impact of their actions and being governed ethically.
What Are The Benefits Of ESG Investing?
Value-based investing is a powerful way to influence some of the largest businesses in the world. Companies will tend to follow the dollars, so as more and more investors look toward ESG investing, there is a powerful motivator for these organizations to be socially responsible.
The fact is that being a good corporate citizen is now smart business. Conversely, companies willing to risk their reputation by exploiting people, polluting, or other poor behavior face the very real prospect of suffering financially.
Should I Use An ESG Fund?
ESG Funds are not individual stocks. Instead, they invest in several different companies. Investing this way helps to reduce your risk, as you will spread your investment across a number of different entities rather than having all your eggs in one basket. For example, if one company your fund invests in runs into trouble, it will have a less overall impact than if you had your whole investment in that company.
What about Returns?
When you strip everything else away, you invest because you want a return on your money. In the past, investing in ESG has been viewed as sacrificing some earnings in return for supporting socially responsible companies.
This is no longer the case. Recent returns shows responsible investing at least matching and often outperforming their traditional counterparts. Fund research firm Morningstar found that its ESG screened indexes outperformed for the 2020 years, as well as for the five years before that.
Downside Protection
While ESG funds performed well in good markets, they have also outperformed for the year when they have encountered more choppy conditions in recent times. This is because ESG funds tend to cover different markets to more traditional finds and are exposed to different market forces.
Way Of The Future
Many think ESG funds have a heavy bias toward technology stocks. However, they also cover areas such as renewable energy. As the world around us changes at a pace not seen before, funds are moving out of traditional industrial and fossil-based energy sectors. The move toward a more sustainable future will continue to gather steam, leaving ESG investments perfectly positioned to continue their growth into the future.