Posted February 20, 2024 by Katherine Fox

What is ESG Investing?

ESG investing is investing in companies whose business practices align with your values and screening out companies engaged in practices you don't support. ⁠It stands for “Environmental, Social, Governance” investing and is used to screen investments based on corporate actions. The goal of ESG investing is to use investible assets to encourage companies to act responsibly with long-term risk factors built into their current assumptions.

Is ESG investing just “Greenwashing?”

“Greenwashing” is the practice of making false or misleading claims about the environmental or social benefits of a product or investment. Fund companies looking to profit from investors’ interest in creating a better world push financial products that sound great but don’t move the needle in any real way. 

In reality, the ESG/Impact/Socially Responsible investing world is full of dedicated, passionate advisors, investors, and fund managers who are committed to creating social good through better approaches to investing.  

ESG investing provides a platform for investors to use their voice and “vote with their dollars” to push large corporations to do better in areas including climate emissions, resource preservation, using green technology, social justice, women’s rights, racial justice, LGBTQ+ rights, human rights, animal rights, corporate governance, and myriad other areas. 

None of us want to get sucked into “greenwashed” investments that aren’t truly aligning our values with our portfolio. To avoid greenwashing, investors should:

• Focus on working with an advisor who can help them critically evaluate ESG companies and funds and seek out those that have a track record of genuine commitment to ESG principles.

• This can include looking for ESG companies and funds that are independently verified by a reputable third-party organization and that have clear, transparent reporting on their ESG score, practices, and impact.

We all make decisions as consumers every day. Even labels that we trust to be objectively good (I buy organic produce and dry goods whenever possible) can be used misleadingly by profit-seeking marketing teams who are trying to convince consumers overwhelmed by options to buy their products. 

Less-scrupulous actors falsifying their products behind clever marketing doesn’t mean that an entire category of investment should be labeled as inherently “bad.”

Because there is no universally accepted standard for what constitutes an ESG investment, it’s important to do your own research and work with an advisor who can provide credible sources of information on your portfolio funds.

Look for a partner who can help you understand the nuances of different problems, the shortcomings that exist in the ESG space, and how you can navigate these issues as part of your journey to create a positive impact with your wealth. 

What is ESG Investing?

What are the returns of ESG investments?

One of the most commonly held myths about ESG investing is that creating positive impact with your wealth requires sacrificing returns relative to “traditional” investment opportunities.

In the early days of ESG investing, when fund options and technological capabilities were limited, it was difficult to achieve market rate returns if your wealth was focused on creating positive change. An explosion of interest in ESG investing from socially conscious investors who demand better from the financial services industry means that today’s investors don’t face this tradeoff with ESG investing. 

While it is possible to focus your portfolio on below-market rate investments if that is your primary objective, everyday investors interested in ESG investing should expect that their portfolios will earn market rate returns and that creating positive impact with their wealth won’t have a negative effect on reaching their long-term financial goals. 

As an investor in ESG companies and funds, you will still own large, profitable companies within your portfolio. The difference between your portfolio and a standard portfolio is the number of those companies you own and the level of exposure your portfolio companies have to industries and business practices that you find undesirable or morally questionable. 

This doesn’t mean the performance of ESG funds will exactly mirror the performance of traditional investments during any given period.  Investment performance is influenced by a wide range of factors, including macroeconomic conditions, industry dynamics, and individual company performance, as well as ESG considerations. These factors mean that ESG funds, which have different sector exposures than traditional funds, may under or over-perform during a specific period of time. 

Investors looking to create a positive impact with their wealth should take a long-term view of ESG considerations. Think of the difference between companies that prioritize environmental sustainability versus companies that neglect ESG principles. The former may be better positioned to navigate regulation and changing consumer preferences, leading to long-term financial benefits, while the latter may face financial risks, such as lawsuits, reputational damage, and declining consumer trust.

Why should I care about ESG investing? 

If you care about protecting the earth from climate change, preserving scarce resources and fragile ecosystems, promoting social justice and racial equity, fighting for women’s rights, or protecting and advancing LGBTQ+ rights, then you should care about ESG investing.

By investing in companies that prioritize environmental sustainability, social responsibility, and good governance, ESG investors aim to promote responsible business practices and drive positive change in those three areas. If you care about the above issues, among others, and aren’t considering ESG funds in your portfolio, then the companies you own may be actively working against your personal values. 

ESG investors encourage companies to adopt environmentally friendly business practices, such as reducing carbon emissions or conserving natural resources.

The growth of ESG companies and funds also encourages large companies to improve their labor practices, such as paying fair wages and offering safe working conditions. This growth further benefits companies that prioritize transparency and accountability, such as those that are committed to reducing corruption and promoting good governance.

Consider the following statistics:

• Oil and gas jointly were estimated to account for about 54% of all global carbon dioxide emissions in 2017. Carbon dioxide emissions are a significant contributor  to climate change.

• In 2014, about a third of oil, gas, and mining projects by companies in the Russell 1000 had high risk exposure to indigenous community opposition or violation of indigenous peoples' rights. Private encroachment onto indigenous land threatens the self-determination rights of local communities.

• Since 1989, state-based violence has been responsible for an estimated 1.4 million deaths globally. Companies that manufacture or use military weapons may violate the human right to life, liberty and security of person as articulated in Article 3 of the Universal Declaration of Human Rights.

• In the United States, poor communities bear disproportionate health risks as a result of disparities in access to safe and reliable drinking water.

Do you want your money going to support companies engaged in these practices? 

Can ESG investing really make a difference?

Do you support local businesses and try to spend your everyday budget at companies whose values align with yours? Do you think we all have a responsibility to vote? The same principles apply to creating impact through ESG companies, funds, and investments. 

Each investment decision you make, regardless of the amount of money involved, can make a difference in promoting responsible business practices and driving positive change in areas such as environmental sustainability, social responsibility, and good governance.

ESG investing is not just for individuals and families with large amounts of wealth. By pooling your resources with other impact-focused ESG investors, your money becomes part of creating significant collective impact. 

Imagine if you didn’t bother shopping locally because you were only buying a $5 latte. Now imagine your decision multiplied across hundreds of thousands of people living in a given city. All those independent coffee shops we treasure and love would go out of business and we’d be left with a landscape of national chains. 

Or, if you didn’t bother to vote because it’s so exceedingly rare for an election to be decided by just one ballot cast. 

The same principle applies to creating positive impact through ESG investing. Your dollars may move the needle alone, but OUR dollars can and will.

ESG investing also gives you the power to vote proxies. Proxy voting is a ballot cast on behalf of a shareholder in an organization (you, as an ESG investor). In recent years, a growing number of ESG considerations have been presented on proxy ballots. Engaged ESG shareholders are pressing companies on their plans to reduce greenhouse gas emissions, efforts to promote diversity and inclusion, and disclosure of political spending, among other issues and concerns. 

Along with the impact of your investible dollars, proxy voting provides a demonstration of the power of collective impact and the power investors and shareholders have to voice their opinions on ESG issues and considerations. 

How can I create positive impact beyond ESG investing?

ESG investing alone isn’t a silver bullet to reform the embedded exploitation and inequality of global capitalism. While ESG investing allows you to create a positive impact with your wealth, we must all still think about how we can go above and beyond to help shape the world in which we want to live. 

ESG investing plays an important role in promoting positive change, but it is only one piece of the overall puzzle. For example, while ESG investing can encourage some companies to adopt environmentally friendly business practices, it will not address the root causes of environmental degradation or create the same impact as government policy. 

A focus on ESG investing is a good first step, but moving forward requires us all to examine the inherent issues with exploitative global capitalism and see how we can be part of a more sustainable and just solution. Moving towards regenerative capitalism, which promotes business practices that restore and rebuild rather than exploit and destroy, is a worthy goal. This move, however, will not take place only through the private markets. 

Investors focused on creating a positive impact with their wealth should consider how they can use their financial and social capital to support philanthropic causes and political advocacy work aligned with their long-term goals. An advisor focused on creating overall impact beyond your investment portfolio can help you build long-term plan for financial success that incorporates your values and focuses on creating impact in a way that is personally meaningful for you and your family. 

While ESG investing promotes responsible business practices and drives positive change in areas such as environmental sustainability, social responsibility, and good governance, it will not be the final solution to all of society’s ills. It is, instead, one piece of a much larger puzzle and understood as part of a larger, systemic approach to creating positive change.

Let’s take the next step together

Understanding how to create positive impact with your wealth is not easy. Investors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to create positive impact with your wealth.