Investing is about more than just choosing an asset based on its risk and return profile. Socially responsible investors take extra factors into consideration when investing their finances to ensure their personal values and the values of the company they’re considering investing in are compatible. There are two major categories of responsible investing: 1) environmental, social, and governance (ESG) investing, and 2) impact investing.
Examples of ESG investing
ESG investing takes into consideration how a company operates in three broad categories of business activities.
The environmental metrics a company may be evaluated by can include how they handle natural resources, reduce their pollution, and even how they treat animals. An environmentally conscious investor may choose to avoid investing in a company that produces excessive waste, while favoring a company that has committed to reducing its carbon footprint over the next five years.
To determine a company’s social metrics, look into the company’s relationships. This may include evaluating how the business treats members of their supply chain, how they’re impacting their local community, and their employees’ working conditions.
Governance metrics can refer to how transparent the company is with finances and staffing its executive team and board of directors. This includes evaluating if the company uses its power and financial backing to manipulate political outcomes. It also considers the diversity of the board, including whether there is adequate female board representation. Whether the company is or has been involved in illegal activities even has a strong impact on its governance metric.
While a company may not have exceptional ratings in all three criteria, supporting those companies that have values similar to your own can help guide positive corporate change over time.
Impact investing takes ESG-conscious investing a step further by investing with the intention of spurring positive change in a specific community or environment. At Cook Wealth, our impact investing clients value different missions, like women empowerment, supporting companies with Christian values, or investing in those that combat gun violence. Every client is different, and our advisors go the extra mile to help build an investment strategy that is both effective and aligned with the client’s values. We know that the long-term payout of impact investing can be two-fold: financial gain, as well as social, environmental, and educational improvement.
ESG-conscious and impact investing are growing concerns for young investors
Among millennial investors, ESG investing is quickly growing in popularity. In fact, here at Cook, almost all of our 45-and-younger clients ask about ESG portfolio options, even if they don’t have specific causes in mind. It’s a huge part of the investment industry. By 2025, investment analysts expect the value of ESG assets to surpass $53 trillion and to represent over one third of all managed assets.
This generation expects the companies they support – whether with their investment dollars or their consumption dollars – to act responsibly and transparently with concern for the environment, employees, and the community. Investors are calling for more from the companies they support, not just a quick or steady profit.
One of my favorite quotes on the topic of ESG investing is this one:
“Sustainability is not a recent fad; it is a long-term strategy. When a company has a heightened focus on providing resiliency, renewability, and safety, it understands that human flourishing and economic opportunity are often mutually reinforcing.”
– Dolores Bamford, CFA. Director of Investment Research at Eventide
Many investors have ignored ESG-conscious investing in the past because of its reputation for missing out on strong return opportunities. But the reality is that investing responsibly is more than just a goodwill strategy. Companies with low ESG metrics are at risk of facing lawsuits, Environmental Protection Agency violations, low employee morale, and bad press. Avoiding investing in companies that have weak ESG metrics can actually help mitigate unnecessary financial risk. And by impact investing, investors are helping to build a healthy community, economy, and environment that will produce immeasurable long-term benefits.
How can Cook Wealth incorporate ESG and impact investing into your investment strategy?
At Cook Wealth, we build completely diversified ESG-conscious portfolios that screen out, and intentionally include, specific ESG metrics. Our basic ESG portfolio, before we take into account your specific impact goals, includes investments like electric vehicles, clean technology, solar innovation, and clean water resources. But this base ESG portfolio can be further customized, without giving up return, around your specific direct-impact goals. It does take a little extra effort on our part to create these customized portfolios that balance ESG metrics and long-term results, but the team here at Cook truly believes going the extra mile to care for ESG and impact needs is worth the work. We see the difference impact investing can make in a community, and we want to give every client the opportunity to invest in what matters most to them.