If you are considering investing, you are in the right place. But there is a type of investing that could prove itself useful in terms of growing your portfolio. Enter ESG investing. This uses a certain framework that rates companies based on three areas.
If a company rates high in these three areas, they are seen as companies that can be favorable for ethical investors. This is a guide on how you can become an ethical investor. We’ll give you a basic definition along with some examples.
Then, we’ll explain what the ESG framework is and how it will be helpful with your investments. Investing does take risks. But being ethical can also mean being smart. With that said, let’s dive right in.
Ethical investing has various names such as impact investing, esg investing, and others. ESG stands for the following: environmental, social, and governance. We will go in-depth as to what each element is to give you a good idea on what to look for when you look at an ESG report.
ESG investing existed well before the 21st century. In fact, this practice has occurred over the past century. Specifically, investors would consider investing in companies that were in line with their religious beliefs. For example, investors of the Muslim faith would invest in companies that were favorable towards Sharia Law.
Today, ethical investing has been largely based on views and beliefs. For example, those who believe in a better environment and want to combat climate change will look at certain companies that back those claims. One example of an industry is the sustainable energy industry.
They are looking for the best solutions for individuals and businesses to consume less energy. Meanwhile, they are also looking to make a positive impact on the environment. Investors will flock to these companies while avoiding those that do the exact opposite.
Another example of ethical investing can be based on social standings. For example, an ethical investor would invest in a company that is known for providing a diverse workforce and providing better paying opportunities for women. They’ll avoid the companies that are non-diverse and have set conditions that are unfavorable to women (such as the lack of maternity leave).
The ESG Framework as mentioned consists of environmental, social, and governance. Let’s break down each part of them:
Environmental: This is an area where a company has an impact on the environment. This will include how much energy they consume, what they are doing to combat climate change, how they manage waste, and so on. They adhere to environmental laws and regulations to ensure they are protecting the environment and not harming it.
Social: The social aspect seems to carry a bit more weight than the others. That’s because this area focuses on how a company treats its company and customers. Investors will often be on the lookout for any positive ratings on the work environment, health and safety, human rights, diversity, and the equal opportunities for employees. ESG investors must be keen to find any complaints regarding the social aspect of the company. For example, this includes discrimination against genders, sexual orientation, etc.
Governance: Finally, corporate governance is something that needs to be looked at. This includes their business ethics, how executives are getting paid, their donations to political causes, the structure of the board and whether or not it’s diverse, and so on.
An ESG report will ensure that a company will be highly rated in these areas. A high-rated ESG company will often be favored by investors over those who may not provide these reports or have low ratings in one of these areas.
Here’s how you can be an ethical investor that can attain long-term success:
What are your own personal ethics? What do you believe in? What are some things you consider wrong?
These are questions you want to ask yourself before you dive into ethical investing. The last thing you want to do is make the not so smart decision to invest in a company that is the polar opposite of what you believe in.
You have the option to build your own portfolio on your own. While this can allow you free reign on who to choose, the only drawback is the amount of time you may need to commit to it. Otherwise, you’ll want to consider a managed portfolio. Choose an investment firm that specializes in ethical investing and you’ll be able to have someone manage the portfolio for you, taking the time issue out of the equation.
A successful ethical investor is someone who always does their due diligence. They don’t fly into the fog and throw money at a certain stock. This also includes looking at their ESG reports. How are they rated in terms of environmental, social, or governance?
Spend time reading up on the companies that interest you.
Don’t focus on one single industry. Focus on others. Consider what industries you are fond of and why. For example, you might not want to focus on just sustainable energy companies. You could focus on companies in various industries that are becoming more environmentally conscious or socially inclusive.
Ethical investing can be something that can pay off in the long run. There are risks. But you can certainly benefit from it when you make investments based on your own ethics.
Be sure to consider your options when you are starting out with trading. Making investment decisions based on your own ethics can be a great thing for you. Especially in this day in age when companies are being looked at for the way they do business both inside and out.