This topic is becoming a big question among investors and business owners.
These days, ESG analysis is more crucial in the investment process. This helps investment professionals gain a complete understanding of the companies where they will invest their money.
If you are a finance professional or an angel investor, then you should have a brief understanding of ESG investment so you can make an informed decision. Read this article to learn about ESG investment, the answer to the question is ESG investing profitable and how it works.
What Is ESG Investing?
ESG stands for environmental, social and governance. In ESG investing, investing is done with consideration of environmental, social and governance factors. It relies on the assumption that the financial performance of any company is significantly affected by social and environmental factors.
Years ago, the ethical and religious beliefs of the people used to influence their investment decisions. Today, the increasing prominence of corporate and social responsibility and sustainability has led investors to increase their ethical participation in the market.
How Does ESG Work?
There is nothing new in the principles of ESG investing.
The ESG strategy states that you should invest in companies whose scores are high on the environmental and societal responsibility scale as measured by a third party, research groups and independent companies. It takes into account how a company interacts with and serves its communities, workers, shareholders, customers and environment.
ESG investing is a strategy for influencing social change for the better. In ESG investing, it is presumed that the main factors affecting an organisation’s overall performance are environmental, social and corporate governance-related factors. By taking into account ESG factors, investors get a comprehensive understanding of the business they want to invest in, aiding them in risk management and opportunity detection.
Here are three ways in which you can evaluate a company for ESG investing:
Environmental
How much and what kind of impact a company is having on the environment should be taken into account first. This can include dangerous gasses, toxic chemicals, the carbon footprint associated with producing the products and sustainability initiatives to balance supply changes.
Social
How a business enhances its social impact both externally and internally is another factor to consider. These social factors range from racial diversity to LGBTQ equality in the executive suite and staff, as well as in inclusion initiatives and hiring practices. This also pertains to a company’s efforts outside of its core business to advance social causes.
Governance
The term ‘governance’ describes how the company’s top management promotes progress. It covers everything, from issues relating to executive pay to diversity in leadership.
The yardstick for evaluating the effectiveness of an ESG investment should be the impact on the stakeholders, both positively and negatively. The company that makes an effort to balance the advantages of all these stakeholders is a well-run business and, as a result, owns good stocks.
Why Should You Choose ESG Investing?
One of the most important reasons to pursue ESG investing is if it aligns with your priorities. If you are concerned about social and environmental issues, such as global warming, the greenhouse effect, climate change, data security, privacy and racial inequality, you want to ensure that you don’t invest in companies that contribute to all these issues. Instead, invest in those companies that are moving towards ESG movements. One more interesting point about ESG investing is that it doesn’t just talk about fighting climate change and social injustice but also offers a high return.
How Can You Find ESG Investments?
If you want to invest your money to work in an ESG strategy, then here are the multiple ways to determine an investment that will suit your bill.
Do ESG Research
As an investor looking for individual stocks, several outlets publish ‘best of’ lists of the top ESG-rated stocks every year. You can check these lists to determine the potential investments that align with your goals and then create a diversified portfolio. You don’t have to hunt for individual ESG stock, but you can also opt for funds just as you can with non-ESG investing. This saves you from the hassle of selecting individual organisations and letting someone make decisions for you.
You can research ESG exchange-traded funds (ETFs) and mutual funds on the internet. You will find highly rated ETFs and ESG from several fund families and brokerages. However, make a note of the expense ratio for ESG funds. Both ESG characteristics and traditional metrics cost are essential. Over the years, the expense ratios for ESG funds have reduced, but they are still higher than other funds. Thus, you have to pay less premium to invest in ESG-targeted funds.
ESG-Savvy Robo-Advisors
If you want to blend a DIY approach with some guidance, then robo-advisors are there to help you. They offer an ESG-conscious portfolio. However, the guidelines as to what qualifies an investment as ESG may differ between robo advisors. You can consult them, but you have to pay a decent amount of fees, so they are more expensive than a do-it-yourself approach.
ESG Financial Advisors
You can also consult financial advisors who can help you plan your ESG investment. They will give you a high-level view of your financial life that even a Robo-advisor misses out on, like personal value. A financial advisor can guide you to make smart investment choices with high ESG ratings that align with your investment goals. The ESG financial advisors can help you determine whether ESG investing is profitable for you or not.
How Madison Marcus Can Help You
Is ESG investing profitable?
ESG investment is all about considering investing in a company that prioritises the social, environmental and governance factors. Whether it’s profitable for you or not will depend on a lot of factors. You will need not only a financial advisor but an expert in the law when dealing with such matters.
If you need any legal advice on corporate governance and ESG issues, we can help you. At Madison Marcus, our ESG specialists help corporate entities with initial compliance measures to reporting, compliance obligations and more.
For all enquiries, contact us here.
