Buy now you may have heard of the “sustainable investing” or “socially responsible investing” approach known as ESG investing. ESG (environmental, social, and corporate governance) has grown exponentially. From an often-dismissed investment style only appealing to social conscious investors, ESG investing has become a much-respected investment strategy and market force. Now one-third of U.S. assets are managed with sustainable principles as investment screens. Expect this trend to continue and increase further. Under the Biden administration, steps have been taken to combat global warming and appears friendly to ESG. Essentially, this is what ESG is: Environmental criteria consider how a company performs as a steward of the planet (nature). Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates (people). And governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights (how profits are earned and allocated).
Popularity of ESG
The number of ESG mutual funds available to U.S. investors grew to almost 400 last year — up 30% from 2019 and a nearly fourfold increase over a decade, according to Morningstar. Also, according to Morningstar, money flowing into U.S. funds categorized as sustainable hit a record $51.1 billion in 2020, more than double the 2019 record of $21.4 billion. For perspective, the annual flows into sustainable funds had been around $5 billion six years ago. Over half of institutional investors and 45% more fund selectors engaged in active ownership of ESG investments in 2020, compared to 2019, while 35% of institutional investors say corporate behavior as a major criterion in their investment selection. It is estimated that by 2025 ESG assets will reach $53 trillion. That would be one-third of world’s projected managed assets then. The transfer of wealth from baby boomers to millennials is considered a catalyst for the growing popularity of ESG investing. The thinking is because millennials expect more from companies and the products and services they offer in the marketplace. Another factor is the increase of women investors. One analyst specializing in sustainable finance said, “Women are largely focused on investing in high-quality portfolios of companies whose products and services provide solutions to environmental and social challenges.”
Is ESG investing for you?
Aside from the benefits of creating a more ethical portfolio, there is evidence that ESG investments deliver similar returns as traditional investments — and potentially carry less risk. And the numbers show you don’t have to sacrifice returns for lower risk. Recent analysis shows the performance of sustainable funds compared with traditional funds and found that from 2004 to 2018, the total returns of sustainable mutual and exchange-traded funds were similar to those of traditional funds. Regarding risk, there is evidence that ESG investments consistently showed a lower downside risk than traditional funds. A recent study found that during highly volatile markets, such as in 2008, 2009, 2015 and 2018, traditional funds had significantly larger downside deviation than sustainable funds, meaning traditional funds had a higher potential for loss. So, if your investment objectives include positive social impacts in addition to positive profits, ESG investments may be for you.
DIY or get help?
As noted, ESG investments are popular and you have hundreds of choices if you want to own them. Whether evaluating individual stocks, ETF’s, or mutual funds, there are a lot of ESG investment vehicles. Besides the “what”, there’s the “how”. You may choose to create and manage your own ESG portfolio or seek professional guidance. If you do-it-yourself, keep in mind diligent investment analysis is always wise. A thorough analysis of an investment’s fundamentals, risk, and expenses is a prudent approach. Also, be sure your investment considerations are consistent with your unique investment parameters and constraints. Should you want help, expect an investment advisor to focus on your risk tolerance and goals.
Here’s to a positive ROI from your investments along with a positive impact on people and our planet.
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