Getting Started with ESG Investing

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Finding the right stocks to invest in can be a great way to add to your financial security. But unfortunately, 100 businesses are responsible for almost 75% of the global greenhouse emissions problem.

That can be a severe concern for environmentally-minded and socially conscious investors. On the other hand, ESG businesses can provide such investors with an ideal solution for long-term investing and global change.

But what is ESG investing, and how can socially responsible investments help the world as well as your investment portfolio? 

This article breaks it down. We’ll go over what ESG investing is, how it works, and some common FAQ’s on Environmental Social and Governance Investing.

1. What does ESG investing mean?

ESG investing is an acronym for environment, social, and governance factors. Those three specific criteria must be considered excellent for a stock to earn that title. ESG factors include the environment, social responsibility, and ethical governance.

Environment

A company must contribute to climate change by providing options for greenhouse emissions reduction and other energy efficiency measures. This often includes a commitment to the reduction of fossil fuels, increased use of renewable energy sources, and responsible waste management.

Social

A company must adhere to proper health and safety measures in the workplace. They may also support labor standards, human rights, and illegal issues such as child labor laws. Social scores increase when the business makes its support for the local community well-known and maintains sustainable and socially responsible investing.

Governance

Governance involves the set of defined rules and expectations for different stakeholders of the corporation or business. A sound governance system can balance the stakeholders’ objectives and support or propel the company’s success strategy. Environment, social, and governance are essential elements for ESG investing.

ESG stocks and funds must include all three factors to be considered proper ESG investments. Many businesses or corporations contain one or two factors, such as impressive environmental improvement plans and reduced fee structures for their investors and stockholders. But they’ll fail on something such as social benefits and programs for their employees and communities. Implementing even one element is a step in the right direction. But investments are not “ESG” unless all three factors are present. 

2. Is ESG a good investment? 

ESG is not necessarily a good investment for those who want to get rich quickly or ride the risky wave of typical institutional investors. But that’s also not to say that many top businesses aren’t also good ESG investments.

ESG funds and ESG investing are ideal for environmentally motivated people who want their portfolio to have a positive effect through impact investing. In other words, you want to make a responsible investment that supports the businesses’ environment, social, and governance growth… the essential ESG factors. 

You can invest in ESG funds through your stock broker or financial advisors, or in a more hands-on way with micro-investment apps like Robinhood, Acorns, Stash, or SoFi.

3. What are the best ESG stocks? 

There are thousands of ESG investments available via ESG companies. MSCI ESG research accumulates the data on all ESG companies and compiles it to help investors compare their best options. ESG ratings are, of course, based on environmental, social, and governance factors. And ESG indexes are easily accessible based on several factors, including equity, income, and ETFs (Exchange-Traded Funds).

Fortunately, many business, money, and investment websites and publications also post the best options for investing in ESG stocks and ESG funds based on their own in-depth MSCI ESG research of ESG indexes.

Some of the best current ESG stock options are: 

  • Adobe
  • Best Buy
  • Cadence 
  • Idexx Laboratories
  • Intuit
  • Lam Research
  • Microsoft
  • NVIDIA
  • Pool
  • Salesforce

ESG industries are all over the board, but the highest-rated industries currently cover:

  • Diagnostics and research
  • Leisure
  • Retail
  • Semiconductors
  • Software application
  • Software and infrastructure

4. Why is ESG investing important? 

There are several reasons why ESG investing is important. 

  • ESG investing is sustainable and responsible
  • ESG stocks and funds focus on environmental and social areas and aspects
  • ESG companies can improve the world through actual actions 
  • ESG stocks show significant financial growth for companies and investors alike
  • ESG stocks and funds provide lower volatility in the market
  • ESG investing includes fewer legal and regulatory interventions
  • ESG stocks and funds often have fewer fees and are more affordable
  • 49% of millennial investors make their decisions based on ESG factors

ESG practices may quickly become mandatory as global environmental changes occur.

5. Is Tesla an ESG stock? 

Out of 500 S&P businesses, 315 have joined the ESG index. Tesla became an ESG stock in May 2021.

But that doesn’t mean the company guarantees sustainable investing.

Tesla’s socially responsible investing scores are somewhat lackluster, leading to the company’s ranking of the lower 22nd percentile in the auto industry in 2020.

Tesla also has the lowest score of all five auto manufacturers in the S&P 500. So consider that when perusing MSCI ESG research and ESG indexes.

Institutional investors help keep Tesla afloat, and the company shares its rocky ESG standing with less responsible investment options such as Wal-Mart, Disney, Facebook, and Wells Fargo.

6. What is an ETF ESG? 

ETF ESG stands for exchange-traded funds (ETF), environmental, social, and governance (ESG). And they’re part of the responsible investment opportunities within the ESG category.

The terms ESG stocks and ESG funds may be interchangeable in business and general trading practices, but they’re not the same thing. If you own stock in an individual business, you own a small part of that company. In comparison, funds (usually mutual funds) contain stocks from multiple companies or thousands of stocks or specific assets of a particular business. 

Unlike owning stock when purchasing ESG stocks, you do not own the stock when investing in funds. Instead, you’re betting that the stocks or assets listed in those funds will do well over a certain time frame.

Investing in funds is always a great way to diversify investment holdings, as long as those investments show consistent or future growth potential. Therefore, investing in stocks is usually significantly riskier than investing in funds. ESG funds are also usually less expensive than stocks.

7. What companies are in funds? 

Current popular and highly rated ESG funds include: 

8. Is ESG the same as CSR? 

CSR and ESG are similar, but CSR is actually the predecessor of ESG. CSR stands for Corporate Social Responsibility. ESG stands for Environment, Social, and Governance.

Corporate social responsibility (CSR) is when a company acknowledges the need for change and understands the need for accountability. Then, ESG implements those changes into the actual practices of the business.

In a broader comparison, candidates running in a mayoral race may have discussions and debates about the need for more traffic lights in a city and plan for further placement (CSR). But the new mayor ensures the lights are added to create smoother and safer travel (ESG).

Both can be considered impact investing, but ESG always goes beyond the thinking and planning stage.  

Bottom Line on ESG Investing 

ESG investing deals with environmental, social, and governance issues. So the stocks and funds target environmental improvements. They help and support employees and the community at large.

ESG stocks and funds are also not subject to a lot of the red tape and legislative requirements of typical investments. This helps to reduce fees and fines, making them more affordable to those just dabbling in investments or attempting to diversify their portfolios. ESG stocks are sustainable investing for this reason.

Millennials jumped ahead of boomers in 2021 to become the largest age group of adults in the U.S., and almost 50% of millennial investors choose ESG stocks. A responsible investment strategy is significant to this age group since they’ll have to deal with and help mitigate the outcome of the previous generations’ environmental and social mistakes. 

ESG investing isn’t a get-rich-quick scheme or opportunity, but consistent growth patterns are present due to the focus on global progress and improvements. As such, highly rated ESG stocks and funds are expected to continue positive growth patterns. And soon, ESG practices may become compulsory for investment-based businesses. Global revision is crucial in today’s age. And in today’s world, sustainable investing is something everyone should consider getting behind. 

Content in this article reflects the express opinions of its author. Nothing in this article should be construed as financial advice or investment solicitation. Please consult a qualified financial professional with any questions regarding investing, ESG or otherwise.

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