A strong return on investment is not the only way to identify a “good” investment. If you are looking to positively impact the world with your investment decisions, while also growing your portfolio, you can seek investment opportunities in companies that follow environmental, social and governance (ESG) standards.
ESG investing is becoming a primary focus in a business’ succession plan to entice investors by offering socially responsible investing (SRI) options. When you invest in these companies, you support products and services that make a positive impact in the world.
What is ESG Investing?
As more investors consider their personal impact on the world, ESG investing is growing in popularity. Choosing to invest in socially responsible companies encourages the use of ethical practices and products.
ESG factors are major components of SRI options:
- Environmental: How does the company impact the environment? Does the company conserve natural resources?
- Social: How does the company treat customers, employees or other stakeholders? Do they give back to their community by supporting social programs?
- Governance: Is the company exploiting loopholes in legal guidelines? How are internal audits handled?
Who Should Consider Socially Responsible Investing?
SRI is an excellent choice for investors who want a personal connection to their investments because it allows individuals to consciously promote causes they are passionate about through their investment decisions. The ESG investing strategy might be right for you if you’re looking for ways to affect change in environmental, human rights, pay gaps, animal welfare or consumer protections issues.
For instance, you might avoid investing in companies that pollute water sources if you are passionate about global access to clean water. Instead, a company that helps to bring clean water to developing countries might be a good option to add to your portfolio.
What Types of ESG Investments are Available?
ESG investing takes many forms. In addition to traditional stocks and bonds, which can focus on SRI if you prefer, several other types of investments with a wide range of SRI choices include:
- Mutual funds and ETFs: The US SIF website has a list of over 200 socially responsible funds to help narrow your choices.
- Alternative investments: Real estate funds, farmland investments and peer-to-peer lending can promote the environment, sustainability and small business growth.
- Community investments: Investing in community organizations can have a local impact. Look for community development financial institutions (CDFIs) that provide services in low-income areas.
- Micro-financing: Investing in micro-loans can support new startup businesses. Depending on the company you choose, you can help entrepreneurs in developing countries or focus on micro-loans for startups in the U.S.
Getting Started with ESG Investing
Hopefully, you understand more about ESG and what it means to invest with social responsibility in mind. If you’re excited about making a real impact with your investments, consider what’s most important to you before getting started. For instance, your strategy could focus on governance criteria, such as CEO pay and political spending, or avoiding tobacco or weapons companies.
Either way, you must understand that there are various ESG criteria. Online brokers or investment platforms can help you buy or sell ESG investments, but you’ll make all of your own investment choices. Your best option is to contact a CFP® professional with a focus on ESG investing to help you identify your investing goals and set up the right strategy for your risk tolerance.