ESG investing on the rise: Key factors and what you should know

Like the concept of “voting with your dollars,” ESG investing—or environmental, social and governance investing—is an investment strategy that helps individuals align their portfolios with their personal values.

Starting in the 1960s, individuals used ESG investing to not invest in companies or funds that had to do with alcohol, tobacco and gambling. Since then, it has evolved to include a lot more options – such as rating companies on sustainability, governance and social justice efforts. 

While ESG investing isn’t a new concept, research shows that more and more investors are leaning this way and incorporating more ESG strategies into their overall investment portfolios¹.

Why the growing demand and why should you care? Aside from the personal benefits of creating a more ethical portfolio you can feel good about, there is evidence that ESG investments can deliver similar returns as traditional investments while potentially carrying less risk.

Here are some key factors contributing to this growing demand and some considerations for investing in ESG portfolios.

COVID-19, a greater focus on social justice and market volatility

The events of the past year, specifically the COVID-19 pandemic, the heightened focus on social justice and the inauguration of a new president have all pushed ESG issues further to the forefront. With these conversations top of mind, investors started to seek out more companies and fund options that aligned with values.¹

On top of these discussions and focus on these efforts, ESG funds have proven to be a bright spot amid the volatility and economic uncertainty that came with the COVID-19 pandemic. With the market in such a volatile state, ESG investing highlighted the importance of maintaining a diversified portfolio with companies that purse sustainable and sound business practices. In fact, ESG focused strategies garnered a record level of inflows in 2020, as more ESG funds have proven they could outperform the broader industry.¹

Because of this performance, investors can see that they don’t necessarily have to forfeit financial returns for aligning their investments with their values – a common misconception of ESG investing in years past.¹

Younger generations contributing to demand – but ESG isn’t just a young person’s game

In addition to the events of last year, younger investors tend to be the driving force for growing demand of ESG investing.¹ This same research predicts that this will only continue to grow as a younger generation of socially and environmentally conscious investors inherit and grow their wealth.¹

But ESG investing is not only a growing priority for this next generation of wealth. Many high-net-worth investors view sustainable investing as a complement to more traditional philanthropic giving efforts and incorporate ESG factors more broadly across their portfolio.¹

Because of these factors, in addition to more ESG investing choices than ever, ESG investing continues to grow.

Considerations for ESG Investing

When working with a financial professional on ESG investing, start first by considering your own personal values and beliefs. ESG has some pretty clear boundaries but it can be difficult to find funds that match perfectly to your beliefs. Start by documenting overall themes that are important to you rather than specific companies – maybe it’s diversity, the environment or whatever it may be. Knowing what’s important to you in addition to performance helps create a solid ESG investment foundation.

This is also a good time to talk with your financial professional about your risk tolerance and return expectations as ESG investing portfolios could potentially help you with these objectives.

Do your research

When looking at ESG funds, funds and companies are evaluated based on the following in these three categories:

Environmental factors:

• Is the company working on reducing climate change? If so, how well?
• What is their use of natural resources and how do they handle waste?
• Are they investing in clean technology, renewable energy or sustainable practices for their buildings?

Social factors:

• Do they provide a safe working environment?
• What are their supply chain labor standards? Are there labor force development opportunities?
• Are their products safe? What do they do to ensure product safety?
• What do they have in place to protect data privacy?

Governance factors:

• Are they diverse and have a diverse leadership team?
• Are they focused on diversity and inclusion efforts?
• What does executive pay look like?
• Overall analysis of ethics and transparency

Working with your financial professional can help ensure that due diligence on funds is completed. Fund managers will dig into these factors, conducting interviews with key leaders at these companies and stakeholders. ESG investing hurdles have been related to data availability on performance and credibility but working with a team of experts can help eliminate some of these research headaches and help create a portfolio that not only is aligned to your values but also your investment objectives.

Talk to your financial professional today

While some investment fads come and go, the factors driving the need for ESG investing practices are here to stay.

If you’re interested in incorporating ESG principles into your portfolio, you don’t have to overhaul everything. Talk to a financial professional about your interests, beliefs, risk tolerance and more – as everyone’s ESG investment approach looks different. 

 

^{Source: 1 Demand for Environmental, Social, and Governance Investing Grows in Fits and Starts, Cerulli Edge, 2Q 2021, Issue 71.}

^{Our strategies with an emphasis on environmental, social and governance (“ESG”) factors take into account non-financial objectives and limit the investment opportunities available to an investor.  ESG investments may underperform or perform differently than strategies that do not have an ESG focus. An ESG focus may result in investing in securities or industry sectors that maintain a different risk profile than the market generally or different risk profile when compared to strategies that are not screened for ESG standards.}

^{Investments will fluctuate and when redeemed may be worth more or less than when originally invested.}