3 Reasons to Consider an ESG Investment Strategy

In light of recent social and environmental movements that have occurred since the start of 2020, ESG investing has seen an exponential increase in popularity. More and more people are fighting for causes like climate change, social justice, and equal pay as shortcomings and unjust practices of many companies and systems are coming to light. People want to see change, and with ESG investing, they can be a part of that change they want to see in the world.

The first quarter of 2021 saw a record high influx of almost $21.5 billion into sustainable funds, and sustainable fund assets topped $300 billion in total by the end of the second quarter. These trends are expected to continue increasing.

This has caused pressure to shift onto companies as they rush to revisit their corporate social responsibility efforts to see if they’re up to par with the growing appetite for values-based investing. Companies are challenged to ensure that their public ESG disclosures align with their efforts to make a positive change for society as well as the environment. 

With this, however, a new problem has arisen, and investors must be cautious of companies that make surface-level ESG promises without actually committing. The drive to achieve a favorable ESG score to win investor support has, in some cases, led to an increase in unethical practices, as seen with the Volkswagen emissions scandal. Companies committing to sustainability might also consider enacting measures to monitor their own employees’ behavior and hold themselves accountable for their promises. 

As a result of the increased demand for values-based investing options, financial advisors are incorporating ESG investment strategies into their service offerings as investors are striving to make a positive social impact with their portfolios — to invest in companies and funds that they can trust will make a difference. Of course, financial performance is still a factor in what investors look for. So what do sustainable investments bring to the table aside from their positive societal impact?

Sustainable funds are particularly attractive for activist investors because they give them the opportunity to make their voices heard in how companies operate with respect to ESG factors. For example, proxy voting gives investors a chance to engage with the companies and helps to minimize risk.

Essentially, this allows ESG efforts to multiply as investing goals shift toward making a positive social and environmental impact. Companies that may not currently have an optimal ESG score have the potential to improve through investors’ efforts to encourage positive corporate social practices. Poor ESG scores may be seen as an opportunity for investors to be proactive by engaging with the company and encouraging improvement, rather than simply a weak investment. 

Today’s investors aren’t simply looking for a guaranteed return. The rise in ESG investing has sparked an appetite for a challenge to make a positive difference, and positive returns tend to be a side effect.

Research has shown that while millennials may have initiated the ESG investing trend that started about a decade ago, that doesn’t necessarily mean that older generations never cared about issues like sustainability. Instead, it may have more to do with the timing of when ESG investment options became available.

The first sustainable mutual fund became available in the 70s, which didn’t gain much traction amongst the baby boomers and older generations that were keen investors at the time. The idea was brand new and options were limited. ESG investment options didn’t hit their prime developmental years until the 2010s, and by 2019 almost 500 active mutual funds were adding ESG criteria to their prospectuses. 

As more and more millennials started investing at the same time that ESG was taking off, their timelines simply coincided with one another. ESG funds were more accessible to millennials when starting out compared to the lack of sustainable investment options available to investors of older generations at the same phase in their investing careers. 

Additionally, CNBC points out that millennials do tend to be more values-driven than previous generations, and values-based investing gives them the opportunity to create a customized portfolio tailored to their different beliefs. 

The number of options and causes that are available to support with your investments today are vast and they’re only growing. Do you only want to support companies that are making an effort to reduce carbon emissions? Or maybe you want to back companies that employ a diverse workforce and promote equal opportunities amongst different groups. With ESG investing, you have the ability to do so.

Perhaps millennials were quicker to pick up on this trend not only because they want to make a difference with their investments, but also because this group in particular has a strong desire for customization.

Growing up as technology was revolutionizing the ways that people perform day-to-day activities and habits, everything was continually becoming more convenient and personalized to the individual. Now, millennials and gen Z’s want to know that they have options, and ESG investing gives them options to personalize their portfolios to match their values. 

That’s not to say that older generations aren’t interested in ESG investing. In fact, sustainability preferences are about equal across generations when it comes to choosing investments, according to Morningstar. Millennials may have spurred the takeoff of sustainable investing, but now every generation wants to be involved.

The Forum for Sustainable and Responsible Investment  (USSIF) reports a number of studies concluding that sustainable funds and ESG investments tend to offer more protection and stability during times of extreme volatility in the markets. Even bond performance tended to increase slightly with a positive tilt to varying ESG factors, according to a 2016 Barclays study. 

These studies may lead you to the conclusion that, as the USSIF states, that aligning your portfolio with your values may not come at an extra cost to you. Working with a financial advisor to create your ESG portfolio is probably the best way for you to ensure that your beliefs are reflected in your investments and integrate well with your overall financial goals.