One of the biggest buzzwords lately in investing isn’t even a word, it’s an acronym: ESG.
ESG stands for Environmental, Social, and Governance. The concept is becoming increasingly prominent, and retirees should be aware of how it can affect their investments – and how they may want to adjust their investment decisions.
How is ESG investing different?
The concept of ESG investing has many names. Some you may have heard are sustainable investing or responsible investing. These terms all refer to the idea of investing according to a set of moral or ethical principles.
One simple way to achieve this is to use a positive or negative screen when selecting investments. A positive screen might lead you to invest only in companies with well-documented green business practices. A negative screen may exclude any companies that use Chinese sweatshops from your portfolio.
Common ESG themes:
|Animal welfare||Child labor||Shareholder rights|
|Climate change||Human rights||Political lobbying|
|Deforestation||Employee relations||Executive compensation|
|Renewable resources||Diversity and inclusion||Corporate risk management|
Why consider ESG investing?
For many people, it just feels good to have investments that align with your convictions. Investing in companies whose business practices you consider ethical also rewards them. In theory, providing capital can help them develop and grow. Likewise, avoiding companies that don’t align with your values can “punish” them.
But what about your bottom line? After all, when we invest, our goal is to make money. Here, the picture is blurrier.
Some research has shown that ESG funds have underperformed, while other studies point to ESG having positive impacts and better downside protection.
Are there any downsides to ESG investing?
Most ESG funds are actively managed. This means you have to pay a portfolio manager to choose which companies to buy (and if or when to sell them) in the fund. Unlike passive funds, which simply track the performance of a particular index, actively-managed funds have higher fees. But there are a handful of lower-cost, passively-managed ESG investment options available.
There is also the challenge of ensuring that the companies or funds in which you invest actually walk the talk. Some companies claim to follow ESG practices, but don’t. This is called “greenwashing.” Often, this happens unintentionally, as companies are eager to get on the ESG bandwagon. But in other cases, companies purposely mislead investors about their ESG stance.
How can I get started?
ESG investing is a fast-growing but relatively new concept. If you’re interested in learning more and possibly adjusting your portfolio, a financial advisor can help you decide on the right ESG investing strategy. Click here to browse our advisor directory to find one in your area or get started with a no-cost, no-obligation review of your financial plan.