For the last few years, the term ESG has been floating around the finance community, especially with younger investors. But what is ESG and why should you care? Let’s get started with the basics.
ESG stands for Environmental, Social and Governance. When you combine that with investing, the combined meaning is essentially investing in companies whose mission or focus is on one of the key pillars or all three; in other words, it’s sustainable investing. The goal of any investor is to generate positive returns. The goal of an ESG investor is to generate positive returns, but with companies that will benefits the environment and society as a whole. The term ESG dates back to 2005, so it’s been around for quiet a while now. However, it has really gained momentum in the last 5 years or so as some of the large institutional investors have placed more focus on socially responsible investing. In fact, today there is more than $20 trillion dollars invested in ESG focused companies.
Benefits of ESG Investing
There are more benefits to ESG investing than just making money and investing your money in companies that do good. For example, when you practice ESG investing it makes you feel good because you are putting your money into a company that supports your values and is doing something for the greater good. You are putting your money into a company that has more goals than simply making a profit and pleasing its shareholders. For example, Costco is a company that has made ESG a priority. They actually recently announced that Costco stores will be using and selling compostable coffee pods; that Corporate has revised the company’s use of chemicals; and that is plans to install solar panel on its stores across the nation to reduce its energy usage. In addition to this, Costco also treats its employees extremely well, paying them well above the minimum wage seen at retailers around the country. Costco also offers its employees great benefits and perks, which clearly checks off the S and G box in the ESG acronym. Reading about Costco’s ESG initiatives and their focus on ESG is what ESG investors look for before making an investment in it.
Another pro with ESG investing is that it’s a way for investors to diversify into different stocks and companies. Researching ESG companies often expands the type of companies typically invested in. For instance, there are a number of energy companies or stocks that investors can choice from. However, there are not many energy companies that are focused on ESG. By narrowing your search group to ESG energy companies you will likely find companies that are off the beaten path. One of the highest rated ESG energy companies, for example, is Eversource Energy. Let’s be honest, when you think of energy companies you are typically thinking Exxon, Chevron, Con Edison, etc., not Eversource. However, Eversource pays a good dividend and has generated great returns for investors over the past 5 years and has increased over 25% in the last year or so. Eversource Energy is another example of a strong company, generating solid returns for investors that has ESG front of mind.
Concerns of ESG Investing
There are some concerns with ESG investing, though. The biggest of all is that ESG investing is a fad and will fade with time. This concern has been around since ESG investing was initially announced back in 2005, but 14 years later ESG investing is still around and stronger than it has ever been. I highly doubt that ESG investing is, or will be, a fad. In fact, take a look at the chart below; a quick glance at that and it does not look like ESG investing and the focus on ESG by companies is fading.
The other concern with ESG investing is that companies that focus on ESG are less profitable and have lower returns than other companies. Research shows, at least over the last few years, that the stocks of ESG companies have actually outperformed their less sustainable peers. This fact is depicted in the chart below.
