What is ESG? How to get started in ESG investing? 4 ESG funds you can invest to...

Traditionally, deciding where to invest or put financial assets was based on a wide-ranging set of criteria, with the financial return getting the lion's share of consideration. However, with time changing and people becoming more concerned with the "ethical" purpose of investments, the other criteria that have been disregarded for most of the time are now thrown in the limelight. Therefore, investors and providers are no longer solely focused on the financial returns of an investment but also on its impact.

Socially responsible investing or ethical investing has been around for years. Still, it is only now that it is taking root and growing. Investors and providers alike are scrambling to be part of this bandwagon with the acknowledgment of the myriad opportunities and benefits it exudes. In general, socially responsible investors want to invest their financial wealth and assets in corporations or projects that promote environmental protection, consumer protection, human rights, diversity, animal welfare, social justice, and corporate governance; in short, they want to invest in endeavors that promote sustainability.

However, the words "sustainable" and "sustainability" have a lot of gray areas, which makes things more challenging and confusing. As such, ESG investing or Environmental, Social, and Governance investing was formed to solve these uncertainties and concerns. ESG investing utilizes a specific set of criteria or metrics to judge and evaluate investments and firms' collective conscientiousness in an attempt to arrive at and define what a sustainable investment is. 


What is ESG Investing?

ESG investing is a form of investment where an investor invests in a firm, company, or product that is credible and deemed ethical, responsible, and sustainable. It is one of the many forms of sustainable investing. It primarily considers three factors that serve as sustainability indicators, namely environmental, social, and governance factors. These three are regarded as the primary metrics in gauging an investment's financial return and overall impact. As such, an investment's ESG measure reflects the deemed sustainability score based on the three categories that make up ESG (environmental, social, and corporate governance.)


What is ESG?

ESG criteria measure the performance of companies or firms in three specific indicators. The first indicator is the Environment, which looks at how an investment affects the natural world; conservation and environmental sustainability are its focused. The second indicator is the social factor that examines how the firm and investment treat and interact with people inside and outside of the company. The third and last indicator is corporate governance, which is primarily engaged in running a company.

Here are some of the things ESG considers:

Environmental

Social

Governance

·       Climate Change

·       Carbon Emission

·       Air and Water pollution

·       Biodiversity

·       Deforestation

·       Conservation

·       Waste Management

·       Energy Efficiency and Initiative

·       Water Scarcity

·       Gender and Diversity

·       Human Rights

·       Consumer Protection

·       Data Security and Data Protection and Privacy

·       Community Relations

·       Labor Standards

·       Employee engagement

·       Sexual Harassment Policies

·       Customer Satisfaction

·       Board Composition

·       Political Contributions

·       Auditing Structure

·       Bribery and Corruption

·       Executive compensation

·       Employee Compensation

·       Lobbying

·       Lawsuits and whistleblower schemes

How to get started in ESG investing?

Though ESG may look constraining and therefore limiting the possible returns, it is not. The options may become limited, but the return is a different story. Many investors and providers are getting on board with ESG because it is profitable and poised to become more successful in the coming years.

The profitability of ESG is not a myth. As proof, according to the 2020 trend report of the US SIF Foundation (a forum for sustainable and responsible investment), there is a growth of 42% growth for assets managed using ESG strategies. This growth in actual number translates from $12 trillion at the beginning of 2018 to a whopping $17.1 trillion at the beginning of 2020. In addition, 9 ESG mutual funds in the US become some of the best performing funds, even outdoing Standard & Poor's 500 Index last year.

So, how will you get on board? How will you start your ESG investment? This section will feature the three easy steps you should take to begin your ESG investing.

1.      1. Choose the way you will take

Like starting other investments, ESG investing requires the investor to decide how to proceed with the investment. If you want an ESG tailored portfolio, you can either choose to do it yourself, do it with a robo-advisor, or move with it together with a financial advisor. All three have their perks.

 Do it Yourself.  If you want to see things on your own or want to ensure that a firm's sustainability initiatives align with your moral compass, then you do ESG investing by yourself. You can search for "best list" and screen them yourselves. A brokerage account will also help you to assess ESG investments better.

Robo-advisors. Starting an investment might be overwhelming to some, and so a robo-advisor might be of use. Robo-advisors are the best fit for those who want to do the investment themselves and partially have guidance but for a lower fee than an in-person financial advisor.

Robo-advisors are digital advisors that manage portfolios based on the risk tolerance and goals of an investor. Aside from these, some are also providing ESG specific portfolios for no extra charge. Investors who are ESG investing with the aid of robo-advisors are poised to receive expert-level investment research and automated management.

Many robo-advisors offer ESG-conscious portfolios like Betterment, Eartfolio, and Sustainfolio, so choose the one that fits you, your preference, and your moral compass.

Financial Advisors. Working with a financial advisor is just like with Robo-advisors in terms of getting advice, guidance, and strategy. Though financial advisors cost more, they can give more thoughtful advice as they can have a high-level view of your values to align them to your ESG portfolio better. They are also great allies in investing.


2.      2. Know your values and ESG priorities

Individuals from different backgrounds have differing sets of values. They also have a different set of principles and priorities. With ESG investing being a form of investing that reflects individuals' values based on specific categories, investors should better assess their personal values and priorities to align it to the ESG portfolio. By doing so, investors can make sure that their ideals are reflected in their ESG investment.


3.      3. Look for your ESG Investment

If you are already finished setting an account and sorting your ideals and priorities, you can now start creating your portfolio. There are many research and lists in the market that are available to see the ESG score of different companies and funds; you can use these to decide whether you will invest in that company or fund. To diversify your portfolio, you'll likely want to include both individual stocks and mutual funds.


4 ESG funds you can invest to

1.     1. Vanguard FTSE Social Index Fund

YTD return:     

19.13%

5-year return  

19.79%

10-year return

16.18%

Yield:

1.01%

Expense Ratio:             

0.14%

Top Holdings:

Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc., Alphabet Inc. A

Category:

Large Blend

Morningstar Risk Rating:

Average

Sustainability Rating  

Above Average

Environmental Risk Score:      

2.8

Social Risk Score:

10.2

Governance Risk Score:

7.8


2.     2. Parnassus Core Equity Investor (PRBLX)

YTD return:     

19.95%

5-year return  

15.67%

10-year return

16.42%

Yield:

0.37%

Expense Ratio:             

0.25%

Top Holdings:

Microsoft Corp., Applied Materials Inc., Deere & Co., Comcast Corp Class A, Amazon.com Inc.

Category:

Large Blend

Morningstar Risk Rating:

Low

Sustainability Rating  

High

Environmental Risk Score:      

3.6

Social Risk Score:

9.6

Governance Risk Score:

6.8

3.     3. 1919 Socially Responsive Balanced Fund Class A (SSIAX)

YTD return:     

11.51%

5-year return  

12.02%

10-year return

11.34%

Yield:

0.05%

Expense Ratio:             

1.16%

Top Holdings:

Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. A. The Walt Disney Co.

Category:

Allocation--50% to 70% Equity

Morningstar Risk Rating:

Average

Sustainability Rating  

High

Environmental Risk Score:      

2.5

Social Risk Score:

9.9

Governance Risk Score:

7.3


4.     4. AB Sustainable Global Thematic Fund Advisor Class (ATEYX)

YTD return:     

16.20%

5-year return  

17.43%

10-year return

13.48%

Yield:

0.12%

Expense Ratio:             

0.81%

Top Holdings:

Infineon Technologies AG, Flex Ltd, Royal Philips NV, SVB Financial Group, Vestas Wind System A/S

Category:

World Large-Stock Growth

Morningstar Risk Rating:

Above Average

Sustainability Rating  

Above Average

Environmental Risk Score:      

3.0

Social Risk Score:

8.3

Governance Risk Score:

6.3


3 Tips when ESG investing

  1. 1.     Understand what you are looking for. Know the things you want to see. If you do not know the things you are looking for, you will have a hard time finding an ESG investment that fits your values. But if you understand what you are looking for, you will probably invest to the fund or company that has ESG achievement that reflects the things that matter to you.
  2. 2.      Look on the coming years
  3. Since ESG is not more focused on moral considerations (ethical investing), you should study, look, and consider investing in industries and companies (still those fit in your values) that are forecasted to be more profitable in the future.
  4. 3.      Use the different rating systems available to you
  5. If you are committed to ESG investing, you should try using the various rating systems that rate companies and funds. With the quantitative score they provide, you can decide which among the companies or funds is better in specific areas, making the decision of where to invest easier.
  6. 4.      Look for ESG investments abroad
  7. Sustainable investment opportunities are present worldwide so, if you want to expand your portfolio while dealing with the same industry, you can evaluate sustainable investment opportunities abroad.
  8. 5.      Beware of "Greenwashing"

Since ESG investing is becoming more profitable, more funds and investment providers are trying to have a share of it though they have limited experience. Carefully assess and evaluate companies and funds if they are genuinely committed to sustainability.