What investors need to know about ESG investing | Smart Switch: Personal Finance

(Stefon Walters)

ESG investing focuses on environmental, social and governance principles. It has grown in popularity over the years.

Sometimes called sustainable investing, impact investing, or socially responsible investing, ESG investing it’s a way for investors to look beyond earnings and consider the role companies play in the world’s common good. Here’s what you should know about it.

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ESG metrics

There are three main metrics used to rate companies based on ESG standards. Looking at a company through an ESG lens reveals things about it that you won’t see through financial statements, which is the point.

The environmental part of ESG focuses on how a company’s operations impact the environment, especially with respect to climate change. There are many companies whose operations add to climate change due to high pollution and energy use, for example. That’s something you need to be aware of, not only the company’s role in climate change, but also how climate change may affect businesses and industries in general in the future.

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The social aspect focuses on how a business interacts with people, including its employees, customers, and society as a whole. This can cover topics such as diversity and inclusion, employee safety, human rights, data protection, how a company reinvests in the local community, and much more. As an investor, whether you focus on ESG metrics or not, you need to know where companies stand on these issues as they will prove costly in the future. Mistreating employees results in less top talent, data breaches mean more money spent on cyber security and public relations, and so on.

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Governance focuses on how companies are managed. As an investor, you want to be aware of this because you are also a co-owner. When rating companies in their governance, institutions may take into account transparency, accuracy of financial reporting, compliance, and board independence. If a company has shady business practices, you’ll want to know about it. Some of the most notable business bankruptcies of all time have surprised investors because they simply weren’t aware of what was going on behind the scenes.

ESG funds

There are many money coupled with an emphasis on ESG metrics, making it easier to make investments that align with your sustainability standards. Some funds include all three criteria components, while others may choose to focus on just one or two. You can find funds that focus on specific themes, such as clean energy, cybersecurity, and climate change commitments, as well as broader funds that focus on high ESG standards in general.

there are no universals Ratings in ESG standards, so ESG funds do not always rate ESG metrics on the same scale. You will find that some give different weight to each of the three ESG practices, and others may focus more on a sub-topic within one of the categories. If you are passionate about a particular topic, be sure to read the purpose of the fund and how the companies were chosen.

Don’t forget the basics

If you are going to focus on sustainable investing, which is a good thing, remember to use ESG insights alongside traditional investing wisdom and rules of thumb. You don’t want to get to a point where ESG standards are all you use to make investment decisions. At the end of the day, you are investing to make money. There are ways to do it sustainably, ethically and in alignment with your passions, but you should never lose sight of the purpose of investing. You still need to consider your financial goals, risk tolerance, and other similar factors.

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