Here at Gen Next Wealth, we talk a lot about helping folks get a leg up on their finances. That doesn’t just mean encouraging investing as a way to generate wealth. It also means using investing as a tool to promote the causes you care about.
How we invest, and what we invest in, can have a big impact on the world.
When you invest in a company, your money has an impact beyond your personal finances. That company has the potential to either do good with your money, or do the opposite. So are you putting your money in companies and investments that are aligned with your values?
This question is the foundation of impact investing, often called ESG investing. I spoke about it recently with Jennifer Kenning, CEO and co-founder of Align Impact.
In the investing world, ESG stands for Environmental, Social and (corporate) Governance. These three criteria can be used to help determine a company’s impact on society, as well as its sustainability. In other words, ESG looks at how “good” a company is, rather than how profitable it is.
“It’s investing for a financial return, as well as for a social and/or environmental return,” is how Jennifer explained it. “So we’re not just looking to get a return on our money, we’re looking to get some type of return on our money, plus a quantifiable return back to society.”
That might be a reduction in CO2 emissions or fewer handgun sales — the goal you’re trying to achieve depends on your values. (This type of investing can also be called values-based investing, socially responsible investing, or social impact investing.)
How ESG came about
Investing based on ESG-type criteria started as far back as the 1960’s when investors wanted to avoid companies who engaged in practices they didn’t approve of, such as Apartheid in South Africa, or tobacco companies.
For years, companies didn’t provide the type of information necessary to analyze various criteria at scale. For example, it’s hard to know how much carbon a company emits if they don’t tell you.
Currently, the number of companies that supply this information is growing, partly to meet demand from investors who want to go beyond the balance sheet to look at a company’s values. Still, less than half of the companies in the S&P 500 index provide some type of ESG report. Part of this is because there is no single set of standards for the information that companies must share.
What does ESG measure
Even without formal reporting criteria, companies do tend to follow general guidelines with the information they report. Environmental reporting often covers emissions or energy use, as well as any measures in place to encourage sustainability.
Social criteria attempts to demonstrate how the company interacts with others, whether it’s fair trade or encouraging employees to volunteer.
Finally, corporate governance focuses on information like how diverse a company’s board of directors is: Are there women and minorities represented?
Even if a company doesn’t perform well in an area, some advocates for ESG-based investing contend that even reporting these metrics force companies to improve.
ESG and performance
Of course, if you’re investing in a company, whether it’s “good” or not is only one factor. Most of us want to know if the company is going to perform well and make us money. When it comes to big-picture performance, there’s some debate among experts about how ESG metrics relate to stock performance.
Some investors believe that, practically speaking, good governance is good business. You might be able to avoid investing in a company prone to an oil spill, for example. Skeptics argue that performance should trump factors like sustainability, since the goal of investing is to make money.
However, there is some evidence that socially responsible investing can help you boost returns. According to market research firm S&P Global, ESG funds outperformed the broader stock market during the first year of the COVID-19 crisis.
How to invest in ESG
The recent crisis with COVID-19 may be a catalyst that leads more people to pay attention to the global impact of their decisions. Surveys show consumers are paying closer attention to what is essentially ESG criteria. They want companies who put their employees ahead of profit, for example.
As a result, people might do what Jennifer suggested in our conversation and research the companies they’re invested in. Does that company look like it’s making the kind of impact you want to make in the world? Oftentimes you can get a read on a business’s values just from the homepage of its website.
Investors can also use screeners, like those offered by MSCI, to look for investments that align with their values. If you’d prefer not to do this yourself, you can invest in funds that do the screening for you.
It’s also something an advisor can help you with, and definitely something I’d be happy to help you work through, as well. As a closing thought, I want to remind anyone interested in ESG investing that there are options to put your money to work for your values outside of just investing.
In my discussion with Jennifer, we talked about looking at where you bank — is the firm where you keep your money doing good for the community? It can also come down to community involvement — something I advocate for. That might be voting in local elections and knowing your local government officials, or it could mean mentoring. It may also be a charitable giving plan. All of these are things we can talk about if you’re interested in this type of impact investing mindset.
Sources: MSCI, Reuters, S&P Global Market Intelligence, GAO