By Steve Doster
People using ESG investing can make their money do good without giving up investment returns. Citizens of the world are more informed about the long-term impact companies can have on the environment and their communities. It is no longer a “nice thing” for a company to care about climate change and treat their employees well. Today’s companies must actively measure these items in order to sustain long-term profitability.
So, what is ESG? It stands for environmental, social, and governance. These three categories have several measurable factors to determine a company’s commitment to sustainability. ESG investing combines traditional investment analysis with these ESG factors in order to identify the companies that are forward-thinking on sustainability issues and better positioned to thrive in our changing world.
The “E” in ESG stands for environmental.
This category dives into a company’s impact on the Earth. Data exists for components like the amount of greenhouse gas emissions a company produces, their plans and policies for reducing climate change, usage of renewable energy sources, and history with the Environmental Protection Agency.
The “S” in ESG stands for social.
This area covers the people-related elements of a company including employee treatment, fair pay practices, workplace diversity, efforts towards social justice issues and history of consumer protection.
The “G” in ESG stands for governance.
This measures various aspects such as executive compensation, bonus metrics focus on long-term versus short-term results, structure of board of directors, and transparency with stakeholders.
It’s astonishing that only a few investment managers incorporate ESG factors into their decision process. A leader in ESG investing is Parnassus Investments. They publish ESG profiles on the companies they invest in and actively engage with CEOs to make ESG improvements.
While most of the financial industry continues to focus primarily on financial metrics like earnings-per-share and revenue growth, more investment managers are beginning to incorporate ESG into their decisions. Mutual fund company Vanguard launched their first ESG fund in 2019. And progressive wealth management firms (like the one I work for) invest in ESG-focused mutual funds for their clients. It just makes sense that well-run companies are going to care about their employees and communities.
For investors using an ESG approach, there are benefits in addition to doing good with your money. Research from Morningstar and MSCI found that mutual funds with ESG factors considered performed equally as well as non-ESG funds. Additionally, those funds with an ESG tilt had lower volatility over time. This means less of a rollercoaster ride through different market cycles. Not having huge drops in portfolio value is good because it will encourage investors to “stay the course” and not sell during those inevitable market corrections.
ESG investing is having an impact! The Business Roundtable, an influential organization made up of CEOs from America’s largest corporations, recently redefined the purpose of a corporation to benefit all stakeholders, not just the shareholder. Stakeholders of a corporation include its employees, customers, vendors, communities, and environment.
Corporations historically have focused solely on benefiting the shareholder. CEOs made decisions with the sole objective of making the company stock price increase for the benefit of the company shareholders. This led to many short-term decisions that increased the stock price but had poor long-term results for many people and communities.
With this new definition for corporations, CEOs can begin making decisions that benefit the environment, employees, communities, and shareholders. CEOs will be using ESG factors to measure their progress. And ESG investing will continue to make big changes in our world and communities.
ESG investing is a way to use your money for a greater good without giving up performance. Consider aligning your money with your values by incorporating ESG factors in your investment decisions.
— Steve Doster, CFP is the financial planning manager at Rowling & Associates – a fee-only wealth management and CPA firm helping individuals create a worry-free financial life. Rowling & Associates works to a fiduciary standard of care helping people with their taxes, investments, and financial planning. Read more articles at