What is ESG Investing? Is It a Good Idea?
You might be seeing a new phrase in the world of investing nomenclature. ESG investing might be a new phrase to you, but the concept has been around for a few years. Maybe you’re already employing this investing strategy in your portfolio.
What is ESG Investing?
ESG investing is short for Environment, Social and Governance Investing. This might be the first (or second time) you have seen this term, but this investing concept has been around for over 50 years.
Millennials are largely credited with making ESG investing popular. Instead of solely focusing on making the most profit possible, the “emerging affluent” want to put their money where their mouth is to build their net worth while investing in companies with similar values.
You might know of it as “socially responsible investing” or even “faith-based investing.” Depending on which investing platform you use, you can screen ETFs for socially-responsible factors.
These social-minded funds avoid the following types of companies:
- “Vice stocks” that promote alcohol, tobacco, or firearms
- Military contractors (Stocks that promote war)
- Non-environmentally friendly companies (coal or nuclear power) or companies that heavily pollute the environment
- Companies with low labor standards (child labor, sweat factories)
- Companies that don’t promote gender diversity
Every ESG ETF has a different investing strategy, so some funds will be more lenient or stricter than others. In general, ESG funds adhere to principles of the UN Global Compact.
How To Invest in ESG ETFs
Investing in ESG ETFs and mutual funds is easier than you think. You can do it as a DIY investor or with a robo-advisor.
How DIY Investors Can Invest in ESG ETFs
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More 401k plans are now offering ESG mutual funds that you can invest in, but your only option still might be investing in your personal IRA or a non-retirement brokerage account. Whether you invest with a discount online brokerage like Vanguard and Fidelity or a free investing app like Robinhood or M1 Finance, you can invest in any ESG ETF that trades on market.
You can also invest in ESG mutual funds, but this option might only be cost-effective if you don’t have to pay a brokerage fee to buy the fund. Also, mutual funds might have a minimum initial investment requirement of at least $3,000. If you’re a beginner investor with small amounts of money to invest, ETFs are better because you can buy single shares for $100 or less.
Below are some of the most popular ESG ETF stock symbols:
- SHE: SPDR SSGA Gender Diversity ETF
- KLD: iShares MSCI KLD 400 Social ETF
- LOWC: iShares Low Carbon Target ETF
Like other investing categories, new ESG-focused ETFs are regularly launching to focus on the various environmental and social values.
Bonus Tip: With any ETF, consider investing in2 commission-free ETFs to save money. Even if a trade costs $4.95 to buy or sell, that’s $5 less that are invested to earn passive income.
Use an ESG Investing Platform
You can also automatically invest in different ESG funds with robo-advisor platforms too. During the initial setup process, you decide which ESG values are most important to you and how much money you want to invest. Then, the advisor platform takes care of the rest.
- Low carbon
- Socially responsible
- Gender diversity
- Local initiatives
- Affordable housing
Your portfolio allocation is based on your risk tolerance: conservative, balanced, aggressive
Swell Investing lets you invest in themed portfolios including:
- Green Tech
- Clean Water
- Zero Waste
- Renewable Energy
- Disease Eradication
- Healthy Living
All of these portfolios launched on September 30, 2016. Through June 2018, three of the six portfolios have outperformed the S&P 500 over the same time period. Maybe you prefer investing in index funds, but setting aside a small portion of your cash for ESG investing can also be an excellent way to diversify your portfolio.
Is ESG Investing a Good Idea?
Experienced investors are divided on whether or not ESG investing is a good idea. We’ll look at the pros and cons of ESG investing.
- Invest in companies with similar values as yours (i.e. you can put your money where your mouth is)
- A unique way to diversify your stock portfolio and not completely rely on index funds
- Potentially less risky than investing in with an unsustainable business plan
- ESG ETFs can underperform index funds which track the entire market (i.e. you earn less money)
- Expense fees for ESG funds can be higher than non-ESG investments
- Socially-responsible investing might only invest in “less bad” companies
- Your portfolio might not be properly diversified
ESG funds aren’t guaranteed to help you make money every year (no investment is), but they are another option to potentially build your net worth.
Whether or not you invest in ESG funds or socially-minded companies by trading individual company stocks, investing in ESG-focused funds is another tool you can use to build your net worth. As with any investment, you must perform your due diligence before you invest and you must make sure your portfolio is properly allocated to minimize investment risk.
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