Financial Reports and Analysis, Investment Strategies

What is ESG Investing and Why Should Retirees Care

by Alli Thomas

Jun 22, 2021

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, and the concept has become increasingly prominent in recent years. 

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 your morals or ethics. 

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.

 

Here is a list of common ESG themes:

Environmental


Social


Governance


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

 

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Why consider ESG investing?

If you are like many people, it probably just feels good when your investments align with your convictions. You may find you sleep better at night.

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. There’s a growing amount of research that supports ESG from a performance standpoint. Morningstar released a study earlier in 2019 that showed that 73% of the firm’s ESG stock indexes outperformed non-ESG equivalents since inception. For many investors, combining values-based investing and outperformance is a no-brainer.

 

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.

The definition of ESG investing is a bit fuzzy. Right now, there is no universal standard for it. It can mean different things to different people.

And you have to ensure 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.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

One Response

  1. Theresa C. Astran says:

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