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ESG investing

ESG Investing: Putting Stock in Companies That Do Right

The idea of responsible investing has taken on a whole new meaning recently. More than just about making good investment choices to reach financial goals, the phenomenon of ESG investing considers companies’ responsible practices, not just their current and prospective stock performance.

What is ESG investing?

If you’re wondering what is ESG investing, you’re not alone. A Financial Planning Association survey found 38 percent of advisors report having clients who’ve asked about ESG investing. If you’re not yet familiar, ESG stands for “environmental, social and governance,” the three elements a growing number of investors are looking at before they add company stock to their portfolios. These investors want to know things like how companies are protecting the environment, providing for a safe workplace, fostering diversity, or implementing a corporate structure that is fair to employees and shareholders.

And, while the term is often used interchangeably with socially responsible investing (SRI), SRI can have a different meaning. U.S. News & World Report gives the example of a producer of birth control pills: one person may consider that socially responsible investing while another would not.

ESG Investing Trends

Just how big is this investing strategy? Check out these numbers:

  • Morningstar estimates sustainable investing accounts for $23 trillion globally, which has grown more than 600 percent in the past 10 years.
  • A 2018 Financial Planning Association (FPA) survey found that 26 percent of investment advisors use or recommend ESG funds. It was the first time the FPA asked about ESG funds in the survey’s 12-year history.
  • That survey also found advisors expect their use of ESG funds to increase 20 percent in 2018.
  • Among millennials, 86 percent say they are interested in sustainable investing, more so than other generations.

Based on a recent report about ESG investing, Morgan Stanley predicts it has a bright future. In fact, its growth is expected to be unprecedented, thanks in part to those millennials who, more often than not, take sustainability into account when making purchasing decisions.

Can you lose with an ESG win?

If you haven’t yet considered ESG investing, you may have this very important question top of mind: How do these investments perform?

When ESG investing began taking hold, there were those in the industry who believed the strategy came with financial sacrifices—make a positive choice but get negative returns. As it turns out, that’s not always the case.

Two German academics who studied ESG stock performance in 2013 found portfolios that included high-scoring ESG companies outperformed portfolios that did not. It may not come as a surprise that ESG companies tend to share the characteristics of highly successful companies—they handle crises better, realize higher profit margins and often provide better investment returns.

How to get started with sustainable investing

If you’d like to add ESG funds to your portfolio, here are a few tips:

  • Understand your ideal definition of ESG. As shown with the socially responsible investing definition mentioned above, your ideal ESG company may differ from other investors. Know what’s most important to you and find a sound investment to match.
  • Take your risk tolerance into account to build a diverse portfolio that meets your goals. This key to investing cannot be understated whether or not your investment strategy prioritizes corporate social responsibility.
  • Invest in ESG companies that rank best in class, taking the bottom 10 percent of performers out of consideration due to risk. At the same time, keep diversification in mind as ESG companies tend to come from the same industries, such as tech.
  • Consider exchange-traded funds (ETFs) to make the ESG investment strategy easier and more diversified. Many fund providers offer ESG ETFs.

Ask how we can help

As ESG investing has ballooned in the past decade, we’ve kept our eye out for the best companies that integrate ESG best practices. If you’d like to consider ESG funds in your portfolio, contact us or call (920) 230-2215 to learn more.