ESG Investing - A Beginner's Guide
What is ESG Investing?
Environmental, social and governance, or ESG investing, is a form of sustainable investing that considers an investment’s financial returns and its overall impact. An investment’s ESG score measures the sustainability of an investment in three specific categories: environmental, social and corporate governance.
What ESG Means for Investors
ESG investing focuses on a few simple principles. Environmental investments include companies that are committed to fighting climate change and diminishing their carbon footprint. Socially-conscious companies focus on products and services that boost the general good. And governance-minded investments are committed to diversity among executives and management personnel and transparent, non-discriminatory business practices.
There are a few important benefits investors can realize by jumping into the world of ESG products.
Ambitious Returns
Investors need not worry that a commitment to ESG investing means sacrificing high return rates. In fact, companies that are focused on sustainability are likely to use their resources as efficiently as possible, boosting revenue and increasing innovation over time.2 Instead of acting with a singlehanded focus on quarterly profit figures, these companies are looking to the long term to ensure that they can continue to evolve.
Simple, Streamlined Investments
ESG investing doesn't need to be complicated or risky; in fact, it's likely that you already own some stocks, ETFs, or other investments that are properly classified as ESG. If you're worried about putting all your figurative eggs into one basket, you may want to look into index funds or ETFs that spread risk across dozens (or even hundreds) of companies that have committed to ESG principles.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.