A Beginners Guide To Investing If You Care About The Planet

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Originally posted on May 11, 2021.

One of the investing philosophies that is steadily gaining more traction is called ESG investing. It is a way to build a more ethical portfolio where there is a triple bottom line - people, planet and profits. Keep reading to learn more about how you can implement this investing philosophy as a wealthy woman.

What is ESG investing?

Environmental, social, and governance, or ESG investing, is a form of sustainable investing that considers an investment’s financial returns and its overall impact. An investment’s ESG score measures the sustainability of the investment in three specific categories: environmental, social, and corporate governance. I like to think of it as a triple bottom line: people, planet, and profits. This is in contrast to traditional investing efforts that simply considered profits. And thank goodness, more and more folks are turning to this form of investing.

According to the US SIF Foundation’s 2020 trends report, U.S. assets under management using ESG strategies grew to $17.1 trillion at the beginning of 2020. In 2018, this figure was at $12 trillion. That’s roughly a 42% increase.

Photo by Kebs Visuals from Pexels

Photo by Kebs Visuals from Pexels

What do the letters stand for?

ESG stands for environmental, social, and governance. It is a criterion of various factors that measure the investment’s sustainability.

E is for environmental

The environmental component measures a company's impact on the planet in both positive and negative ways.

Below are some of the analysis components I use:

  • Usage of renewable energy, including wind and solar

  • Recycling and safe disposal practices

  • Green products, technologies, and infrastructure

  • Environmental benefits for employees, such as bicycle commuting rewards programs.

  • Climate change policies, plans, and disclosures

  • Greenhouse gas emissions goals and transparency about how the company is meeting those goals

  • Carbon footprint and carbon intensity (pollution and emissions)

  • Water-related issues and goals, such as usage, conservation, overfishing, and waste disposal.

  • And more

To measure the above, reports from the Global Reporting Initiative (GRI) and the United Nations Principles for Responsible Investment (PRI) are used. Also, you can check out the respective company’s own website to review their sustainability plan. Of course, you’ll want to verify this information since companies always paint their efforts - or supposed efforts - in the best light.

S is for social

The social component of ESG consists of people-related elements, like company culture and issues that impact employees, customers, consumers, suppliers, the local community, and society at large. Personally, anti-racism efforts are at the very top of my list when evaluating companies on the social componet.

Below are some of the analysis components I use:

  • Anti-racism and DEI efforts

  • Financial wellness programs for employees

  • Overall employee treatment, pay, benefits, and perks

  • Employee turnover

  • Sexual harassment prevention

  • Public stance on social justice issues, as well as lobbying efforts (or if the opposite is present, if they support efforts that are anti-progress such as Basecamp and Facebook, they will not receive my investment dollars)

G is for corporate governance

The corporate governance component relates to the strength of the board of directors and company oversight, as well as how shareholder-friendly versus management-centric the company is. It’s kinda boring, but essentially it relates to the efficiency and effectiveness of the company’s structure which does impact performance/profitability.

Governance aspects of companies to research and analyze include:

  • Diversity of the board of directors and management team

  • Executive compensation, bonuses, and perks, including whether executives receive large bonuses when they leave the company

  • Compensation tied to metrics that drive long-term business value

  • Potential for conflicts of interest for the board of directors based on the directors' independence and whether they hold other board seats

  • Whether the company's chairman and CEO roles are separate

  • Whether board votes are decided based on majority voting (winner receives more than half the votes) or plurality voting (winner receives the most votes).

  • Whether the company issues dual- or multiple-class stock

  • Transparency of communication with shareholders

  • The nature and outcome of lawsuits brought by shareholders

  • Relationship and history with the U.S. Securities and Exchange Commission (SEC) and other regulatory bodies

  • And more

You can get the above information by reading sustainability reports or the annual proxy statements. You can access proxy statements on the SEC's website by searching for the filing type DEF 14A.

Why should I care about ESG investing?

Because you care about the planet and people! If you are reading Money & Mimosas, I know that you are interested in building wealth that is in alignment with these values. Aside from that, the ROI on these investments is destined to outpace those that strictly focus on profits. We all know that when you put the planet and people first, abundance follows. It’s one of the laws of nature.

Need proof?

In 2019, the Morgan Stanley Institute for Sustainable Investing compared the performance of sustainable funds with traditional funds. They found that from 2004 to 2018, the total returns of sustainable mutual and exchange-traded funds were similar to those of traditional funds.

Also, that same study found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of asset class. During economic downturns, such as in 2008, 2009, 2015 and 2018, traditional funds had a higher potential for loss.

This appears to be holding true for post-pandemic, but only time will tell. Morningstar recently released a report showing that of 26 sustainable index funds, 24 outperformed comparable traditional funds in the first quarter of 2020 (and the beginning of the COVID-19 pandemic).

Basically, ESG investments perform at least as well as traditional investing. And that’s just on the money side. The nurturing it provides to the planet and people is lightyears ahead of traditional investment vehicles.

How to get started with ESG investing

Since this is a relatively new investment philosophy, you will have more due-diligence on your part. And likely, you’ll have to cherry-pick companies to create your basket of securities since you can not assume that any fund labeled “ESG” will be in alignment with your values.

If you prefer some help instead of doing it completely DIY, you can look into working with a personal finance advisor who specializes in this field. There are also robo-advisor platforms that can help you out.

The key is to know your values beforehand so you are clear on which investments meet your ethical standards and which ones do not.

Want to learn more about ESG investing? Sign up for my next webinar, A beginner’s guide to investing if you care about the planet. Click here to RSVP.

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Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.