What is ESG Investing and Why You May Want to Start
- What is ESG investing?
- ESG factors
- ESG investing vs. socially responsible investing
- Pros and cons of ESG Investing
- How to start investing in ESG stocks
- Robo advisors offering ESG designated investing options
- The bottom line
What is ESG investing?
ESG investing vs. socially responsible investing
Pros and cons of ESG Investing
- Consistently outperforms the market. ESG stocks have a strong history of outperforming the market in the past decade and have done particularly well during the 2020 pandemic. As ethical and environmental practices continue to gain traction thanks to environmental movements and focus in the business world, more investors are interested in buying into ESG stocks. Based on past financial performance and the current emphasis on ethical and environmental practices, ESG stocks are anticipated to continue to perform well.
- Allows you to feel good about where you’re putting your money. One of the main advantages to investing in ESG stocks is knowing you’re supporting businesses that are committed to meeting environmental standards, focusing on ethical practices, and continuing to evolve in a socially conscious manner. If you like to feel good about the types of companies you’re buying ownership in, ESG investing is a great option.
- Lower risk. Not only do ESG stocks perform well over time — but they’re also lower-risk options. If you can identify a true ESG company, you’ll most likely be taking on a less risky investment. Since ESG focused companies focus on fair practices and adhering to government regulations, they tend to be less volatile and have stronger reputations.
- Excludes some profitable opportunities. Of course, on the downside, if you focus solely on ESG investing, you’re likely to miss out on some short- and long-term investment opportunities. Although supporting ethical and environmentally-conscious businesses can be profitable, many other corporations and startups continue to outperform the market. If you’re more of a passive investor, you might have considered ETFs or IPOs to diversify your portfolio. While these investments are often safer and more likely to witness steady growth over time, some of the most lucrative options (particularly those that offer portions of stock from the S&P 500) will not always align with ESG criteria.
- Requires more research. Determining if a company meets ESG standards can be time-consuming and might require combing through sustainability reports. If you’re working with a financial advisor, you might be charged extra if you decide to focus on ESG dedicated companies. If you’re handling your own investments, be ready to spend significant time looking into the companies you aim to support and be sure to keep up-to-date on their practices in the future. Many companies may claim to be ESG friendly, but after research, you might find that their sustainability reports do not reflect these allegations. Since ESG companies are trendy right now, many corporations that do not fully align with this definition are alleging to be “eco-conscious” or “environmentally aware.” Ultimately these claims don’t hold any weight if there’s no data to support them. This extra research might not be an issue for already active investors, but if you prefer to buy into good opportunities without timing the market or researching a company in-depth, ESG investing might be more of a challenge than you’re looking for.
How to start investing in ESG stocks
Decide how you want to invest
Reflect on your ESG values
Choose your ESG investments
Robo advisors offering ESG designated investing options
|Robo Advisor||ESG Only?||Fees||Minimum Investment|
|Betterment||No||0.25% - 0.40%||$0|
|Ellevest||No||$1 - $9 monthly||$0|
|Ally Invest||No||0% - 0.30%||$100|
|Wealthsimple||No||0.40% - 0.50%||$0|
The bottom line
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