Here in San Diego, we at Rowling & Associates believe in doing good for the world. But, working to make the world a better place doesn’t have to come at the cost of your investment returns. ESG investing is more than a passing trend. With ESG investing, you can put your money into companies that are committed to sustainability.
Is ESG Investing a Trend? No.
So, what is ESG investing?
This method of investing is comprised of three categories that are used to determine which companies are best positioned to thrive in our changing world by doing the right things for sustainability.
The “E” stands for environmental and looks at the impact companies have on the Earth by considering factors such as greenhouse gas emissions and use of renewable energy sources. The “S” stands for social and considers the people-related aspects of a company, including employee treatment and workplace diversity. The “G” stands for governance and measures internal parts of the company such as executive compensation and structure of board of directors.
Why take advantage of this method of investing?
For starters, ESG investments actively work to change our world for the better. If you volunteer for nonprofits, use solar power, or donate to charities and causes you support, then you are used to creating change on an individual basis. Investing in these ESG funds allows you to increase your impact.
It stands to reason that companies that are committed to doing good for the world will be committed to doing right by their employees and consumers as well. There are many companies that offer excellent examples of this. One company’s mutual funds do not invest in fossil fuel companies. Another company has an initiative focused on increasing the number of women and people of color on the boards and in senior leadership positions at publicly traded companies. Many of these ESG-focused companies take shareholder dollars and utilize them in the best way possible for the world.
Research has shown ESG-focused funds have performed just as well as non-ESG funds. The ESG funds also showed lower volatility over time, which helps to tamp down on emotion-based reactions by investors during inevitable market corrections. What we have found over time is that ESG funds provide the same return over the long term – but they actually reduce the amount of risk! This is a great benefit to investors, who can feel like they are making a positive difference in the world without sacrificing any of their own portfolio.
How do leaders in ESG use your funds to change the world?
Let’s take a look at a few more examples. One mutual fund company has worked with other shareholder activists to pressure Nabisco, the company that owns Oreo cookies and Ritz crackers, to commit to using sustainably sourced packaging this year. They have also determined that by 2025, 100% of Nabisco’s packaging will be recyclable!
Another company utilizes the voting power of their mutual funds to vote in favor of productive shareholder proposals and against those that they consider destructive. Since there are billions of dollars invested in these funds, they actually have the power to make a big impact on these shareholder proposals – whether they succeed or fail.
ESG-focused companies have been known to invest money in other companies that are doing good for the world so that sustainable practices can grow. They also go to other companies that are lacking in these areas and let management know they have money to invest if the company will make commitments to working to improve the environment, diversity, sustainability, worker protections, and so much more.
As we’ve stated in a previous article, ESG investing is more than just a passing trend.
It is becoming increasingly important to investors to align their portfolios with certain values and standards. In fact, more and more companies are considering ESG factors when creating their mutual funds. As the use of ESG investing continues to grow, it is important to stay informed. To learn more about our approach to ESG investing, please feel free to contact us.