6 reasons why sustainable investments should be in your portfolio
Want to build an investment portfolio that has a conscientious edge as well as a competitive edge? ESG investing makes it possible. Putting money into this type of investment vehicle could give you peace of mind, even in turbulent economic times.
Focus on ESG investing
The term “ESG” in ESG investing stands for “environment, social and governance”. ESG investing is synonymous with socially responsible investing, impact investing, and other types of values-related investing.
Although ESG investing has been around to some extent for a few decades, it has started to take off as a emerging investment type in the 2010s. Penserra, a leading asset management firm, notes ESG investments increased by 38% between 2016 and 2018. This is a good sign for individual and institutional investors. Millennials have spurred this growing interest in ESG funds, companies and other assets. However, it has now become more common. At the end of 2021, Reuters reported that ESG funds had grown in popularity, offsetting 10% of global assets.
ESG investing covers quite a bit of territory, as a quick breakdown of the acronym shows. For example, environmental investments can cover anything from renewable technologies to sustainable food manufacturing. Social investments can fall under the auspices of fair housing, ethical healthcare, or organizations that address causes. Finally, investments in governance may involve dedicating funds to whistleblower protection or lobbying agencies.
Is ESG investing worth it?
As you might have guessed, many people appreciate the sentiment behind ESG investing. Nevertheless, they may wonder if ESG investing is a smart way to manage and grow their wealth.
If you’re questioning the viability of ESG investing, consider the following reasons for incorporating ESG investing into your portfolio. First, remember that you should always speak with a trusted financial advisor before making any significant changes to the existing mix of your sustainable investments. A financial advisor will help you understand how to balance risk against your goals.
1. ESG investing succeeds in difficult circumstances
It’s no secret that the stock market has been everywhere since the start of 2020. The pandemic has added so much disruption to the investment world. And the social unrest and global malaise that followed the aftermath of Covid only further muddied the market.
Yet on closer inspection, ESG investments have performed surprisingly well compared to their non-ESG counterparts. A 2021 academic paper by authors from Fudan University School of Economics in Shanghai found that ESG stocks were less volatile than average throughout the pandemic. This led the researchers to conclude that adding ESG investments to a portfolio could provide an attractive cushion for investors.
What is behind the strong performance of ESG investments? One clue could be consumer interest in supporting socially responsible businesses and publicly traded entities. An article from Harvard Business School explains that almost three-quarters of investors look at the social or green impact of companies. ESG investing may not have felt the same market turbulence as it remained buoyant throughout the difficult years between 2020 and 2022.
2. ESG rating makes it easier than ever to choose ESG investment vehicles
Years ago, it was difficult to know whether an investment vehicle fell into the category of high ESG ratings. Now, a scoring system has been put in place. It’s called an ESG score, and it’s relatively easy to find for any investment.
Admittedly, ESG rating is still in its infancy. There is no single rating method used by all companies or investment companies. However, many ESG rating calculation strategies are coming to the fore. Moreover, the same companies seem to rise to the top of the charts.
For example, Investors has published a list of what it calls Top 100 ESG Companies for 2021. Investors used a tiered scoring approach to achieve results. In early 2022, CNBC reproduced another Top 100 ESG stocks list selected from a JUST 100 list. Unsurprisingly, the two lists showed some overlap. The overlap demonstrates that regardless of the scoring methodology used, the strongest ESG candidates will rise to the top of the most recommended investment vehicles. Therefore, you can probably find those that you can be sure are worthy of your or your clients’ ESG investments.
3. You can put your investment power behind causes you care about
It’s one thing to invest in a company or fund simply because it has the potential to produce significant returns. It is quite another to invest in an idea or a belief. Investing dollars in stocks owned by brands that align with your values can enrich your investing experience. Not only are you making your money work for you, you’re making it work for the world.
For example, climate change continues to be of considerable concern. According to information from the BBC, 60% of Gen Zers worry on the human toll on the planet. The New York Times notes that three-quarters of people who responded to a recent survey were fear for their future due to environmental concerns. Putting money into organizations, associations and funds aimed at reversing the damage done to the earth could be cathartic and lucrative.
You can’t deny or overlook the personal satisfaction of conscientious investing, like sustainable investing, for example. A piece of Yahoo! exploring the growing appeal of ESG investing notes that 72% of American adults are at least moderately fascinated by the concept. However, only 11% of investors would prefer to choose funds and investment opportunities based solely on financial performance.
4. Many ESG investment assets have track records
Is it essential for you to ensure that you can see the performance history of the investments you choose? You’ll appreciate knowing that many ESG investments have been around long enough to show how much your money is likely to swell over the years.
Of course, you may find that some ESG stocks, companies, and investment funds haven’t been around for long. Or, they could have started just before the pandemic. But, with Covid causing so much fluctuation, many investments went haywire between the start of 2020 and the end of 2021.
That doesn’t mean some of your portfolios can’t be dedicated to ESG investing, though. A CNBC article published in mid-2021 predicted that ESG investing could cross the trillion dollar mark by 2030. What this means for you as an investor is that no one expects ESG investing to do anything but generate more interest and steam in the years to come. .
5. You are not limited to a few investment options
If you’re someone who likes to have lots of investment choices, you’ll be happy to know that ESG investing continues to grow. In 2021, Goby reports that there are over 500 sustainable funds available. This is just the tip of the iceberg since sustainable investing only includes one category of ESG investing.
The point is, there’s no reason to compromise on your principles. Want to grow your money from where it is now to where you want it to be? Awesome. You can be sure that countless ESG investment vehicles and assets will meet your needs.
Of course, you may need to do your homework, especially if you are a solo type of investor. Digging around to find a company’s ESG rating can take effort. Still, it’s an effort that can pay off beyond just a smart financial move.
6. It’s becoming increasingly common to talk about ESG investing with a professional
Financial advisors are certainly not surprised to hear clients talk about ESG investing. However, remember that ESG investing has been around for a long time, at least in a niche. Moreover, it reaches a peak of popularity.
Gartner estimates that approximately 85% of investors consider ESG elements when developing their sustainable investing strategies. This means that any solid, competent and modern financial advisor must understand the ESG approach to investing.
Even if you prefer to take a more DIY approach to building your investment portfolio, you can still find great resources online. Research trusted names in the financial industry and read all you can about their experiences with ESG investing and sustainable investing. The more you educate yourself, the more confident you’ll feel choosing between vehicles with impressive ESG scores.
Breathe new life into your portfolio with ESG investing
One of the best decisions you can make as an investor is to review your investment portfolio at least once a year. See how your investments are performing and view their historical performance. This exercise will help you better understand where you are investing. It can also help you better understand whether or not you want to trade some of your assets for ESG sustainable investments.
Like all investment strategies, ESG investing requires attention and focus. Now that you know more about this trend that is heating up the investing world, ask yourself if ESG investing makes sense. After all, ESG investing allows you to put your money where your heart, mind and values are. And nothing beats feedback that feels as good as it looks on paper.
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