ESG investing is growing more popular, but what exactly is it? Let’s take a look at the key things you need to know about this ethical type of investing to help you decide if it’s a good fit for you.
What does ESG stand for?
ESG is an acronym that stands for:
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The environmental aspect relates to whether a company is having a positive or negative impact on the world around them. This could relate to a company’s sustainability, its carbon footprint, or even its water use.
This refers to how a company treats its staff, its customers, and its suppliers. It’s basically how a company interact with people both inside and outside the business.
Finally, we have governance. The full name for this is corporate governance. It relates to how the business is run – whether the company in safe hands and whether the board of directors look after the shareholders.
What is ESG investing?
Now that we’ve covered what the name means, let’s take a look at what ESG investing is all about.
The best way to understand this type of investing is to think of the three headings as filters.
Investments are passed through these filters and if they meet enough criteria, they can be classed as ESG investments. This is mostly done with publicly traded companies because they are easiest to assess.
The ESG approach is slightly different to SRI (socially responsible investing) which tends to exclude companies based on certain criteria.
Does everyone offer ESG investments?
A generation of new investors and millennials have helped drive the popularity of things like ESG funds.
Adrian Lowcock, Head of Personal Investing at Willis Owen explains:
“Covid has accelerated the trend for sustainable investing as people have realised the impact human activity has on the world. Recent events, such as the new US president signing back up to The Paris Agreement, have solidified the fact that climate awareness is high on the agenda, but the issue is the wealth of different choices out there.”
Although demand is increasing, not all platforms offer ESG options. If you think ESG investing is for you, make sure you research a share dealing account first to see if you can invest on that platform.
Is ESG investing profitable?
In the past, companies meeting all of these positive requirements might have been less profitable. That’s not the case anymore.
Sustainable investing is not only becoming more common, it’s becoming just as profitable.
Businesses realise that in order to stick around over the long term, they need to concentrate on more than just making money. Acting positively towards the environment, people and shareholders is becoming more mainstream.
Putting effort into performing well in these areas tends to create a better business that people like to deal with. As a result, companies that meet the ESG investing criteria do tend to be just as profitable, if not more profitable, than businesses that fall short.
How do I get started with ESG investing?
The first step is to research whether your share dealing account offers you access to these types of investments and funds.
Once you’ve found your platform, it may be worth using a stocks and shares ISA if possible. This way you’ll be able to reduce your tax liability on your ESG investments.
Businesses that tick all of the ESG boxes tend to focus on long-term goals. This can make them a great option for a long-term investing strategy.