What is ESG Investing?
Articles Investing World

What is ESG Investing?

Articles Investing World
three people protesting for planet safety

What is ESG Investing?

ESG investing is a type of investment that is centered around several criteria known as Environmental, Social, and Governance.

But before we go deeper in explaining what ESG investing is, we will answer the question: what is ESG?

What is ESG?

ESG stands for “Environmental, Social, and Governance” investing, which is a type of investing that anchors on sustainability factors. It takes into consideration the impact of your money on the environment, as well as social and governance-related issues.

Over the past decade, people’s concern with the environment and utilizing more “green” approaches have dominated their lives. 

From the smallest steps like recycling household items to bigger steps like rallying in the name of climate change, it’s a well-known fact that the world has adopted a more environmentally-conscious approach that stretches into every corner of our lives. 

This approach has also seeped into finances and investing in particular. 

Many people are now seeking non-traditional investment approaches for many reasons that align with their mindset and goals.

Nevertheless, investing is an umbrella term that includes many approaches: both traditional and nontraditional.

ESG, or socially responsible investing, is a nontraditional investment option that has become prevalent lately while growing in popularity.

This term refers to investing while considering several factors: environmental, social, and governance.

For starters, many investors think it’s important to invest in companies that follow a certain well-rounded vision. 

To them, investing is not only about the profits and bounties but also about making the world a better place through socially-responsible investing. 

Hence, these investors view investing from a more socially conscious lens that values non-financial considerations in addition to financial ones.

Read more about Socially Responsible Investing (link)

How does ESG investing work and why does it matter?

ESG investing takes into account all 3 factors to measure the degree of sustainability that a company ranks for. Once decided, these factors go into the investment process to help investors decide on the companies, stocks, or bonds they want to invest in. 

Before we discuss at length the importance of ESG, it’s crucial to break down its 3 components. Let’s start by understanding the” E” in ESG.

Environmental Criteria:

Environmental factors study how a company or government acts in terms of the physical environment. ESG investing takes a closer look at the framework through which a company operates by analyzing if a company’s policies and practices expose a threat to the environment.

A company’s impact and utilization of natural resources are reviewed under this criterion and several issues like climate risk, water scarcity, extreme temperatures, and carbon emissions will serve as key determiners when evaluating if the investment at hand falls under the environmentally responsible investments.

ESG factors: Social

The social factors that are related to a company’s operation don’t go unnoticed by investors willing to partake in ESG. Thus, before taking the step of investing in a certain company, human conditions are also reviewed.

Finding out if a company condones illegal and inhumane practices falls under the social part of ESG. Social factors could include anything that revolves around human rights, labor standards, any exposure to illegal child labor, or infringements on rights.

ESG factors: Governance

Governance refers to a set of principles that describe responsibilities and the way a company is managed by its stakeholders.

Note that a well-thought-out governance approach can be utilized to accord and align interest between stakeholders, while simultaneously serving as a method to further long-term strategies that are important for a company’s future.

In a nutshell, investors who take the road of socially responsible investing assimilate the environmental, social, and governance criteria into their investment processes and choose companies that score highly on this scale. 

This allows them to make conscious decisions that would affect the world because the issues at hand, i.e. social inequity and climate change, are one of the pressing concerns that are affecting the globe as a whole.

But why is ESG important to businesses?

ESG’s importance is slowly shaping up in our current times. The criteria are even expected to become mandatory in the future because of the growing public pressure on companies to adopt a friendlier approach when dealing with consumers, staff, and the environment.

Even now, ESG is growing in value to businesses and investors.

As per businesses, incorporating ESG from the get-go leads companies to become more diversified, equal, and more concerned with the health & well-being of their community and people in general. 

Thus, positively impacting the environment while leaving an eco-friendly mark in the world that paves the way for further change and sustainable growth. 

This is not, however, the only benefit of implementing ESG. This is because ESG also contributes to helping businesses expand into new markets by offering more sustainable products.

On a much brighter note, lower utility costs are a direct result of adhering to eco-friendly rules and implementing eco-friendly facilities in business models, which is something that all businesses love, regardless of their size!

How important is ESG to investors in particular?

Investors who favor the ESG approach consider it to be a fundamental factor that goes into the performance of all investments. Thus, ESG companies are seen as attractive prospects by investors who share the same worldview, leading them to prioritize investing in such companies.

Since ESG is the next big step towards achieving sustainability in terms of selecting decisions that reflect positively on the economy and the environment, investors are engaging in it at a fast pace. 

Taking into account sustainability factors isn’t the only silver lining. Investors are scoring remarkable returns while investing in ESG companies. Regardless, there’s a common misconception detailing that ESG investing isn’t as lucrative as traditional investing. 

In fact, ESG investing achieves similar or even impressive returns when compared to traditional funds and data shows that these returns are similar or even more lucrative.

Another effective reason why ESG investing is important to investors is that ESG stocks don’t just perform well over time but also minimize risk options for investors! 

This is because ESG-centered businesses have a reputation for following government regulations, so they tend to be less volatile!

Another perk to ESG investing is that investors feel tremendously good about themselves! Being part of something bigger than ourselves sure does help lift morale!

 Consequently, such feelings would help investors manage their emotions during difficult market periods, thus, leading to a more balanced approach in general.

Looking for environmentally responsible investment options?

Also, ESG funds or mutual funds focused on ESG factors invest in companies that propagate a sustainable and societal approach.

Luckily, there is a huge array of ETFs and funds to choose from to help you stay in line with your environmentally responsible investing framework! 

Exchange-traded funds are one of the go-to options for many investors because they offer them diversified portfolios at lower costs. 

Fortunately, there is no shortage of ESG ETFs to help investors champion global change in hopes of a better future.

ESG ETFs is a general term used to refer to ETFs that belong to companies that follow ESG guidelines. However, each ESG ETF falls under specific and specialized markets, sectors, or themes (like Solar Energy).

Solar energy ETFs constitute one Renewable Energy ETFs, which are exchange-traded funds that investors can use to invest sustainably. 

These ETFs invest in stocks of companies that specialize in solar energy generation and distribution, installation, solar material, and component manufacturing. 

Note that ESG funds are not individual stocks, they are rather a collection of multiple stocks joined together! 

Before reading about these ETFs, read more about ETFs in general(link)

Why are Solar and other clean energy ETFs and funds important?

The eco-friendly world approach has prompted a shift in the energy sources and the way companies operate. Regardless, the energy sector is still a vital sector and one of the largest industries in the world.

Hence, solar and other renewable energy companies are one of the fastest resorts that investors depend on when ESG comes to mind.

How are ESG ETFs grouped?

There are many different approaches to grouping ESG ETFs, but we divided them into 4 categories based on the way companies are included or excluded. The 4 categories are exclusion, best-in-Class, full integration, and the thematic approach.

Top Solar and Renewable Energy ETFs to Invest In

Ishares Global Clean Energy( ICLN)

This fund was launched in 2008. Its underlying index is the S&P Global Clean Energy Index, which comprises clean energy firms from around the world. Moreover, its portfolio includes the 33 most liquid firms, which are mostly part of the wind and solar sectors.

Invesco Solar(TAN)

This fund was also launched in 2008 and is one of the most expensive ETFs in the clean energy sector and the largest clean energy ETF. The fund’s portfolio includes 24 holdings specialized in all fronts of the solar energy industry. Its top companies are First Solar, Enphase Energy, and Solaredge Technologies.

Invesco WilderHill Clean Energy ETF (PBW)

The fund was started in the year 2005 and it is somewhat diverse. Tesla, Ballard Power Systems, and NIO are some of the largest of its holdings.

Need a refresher? Get information on how to invest with Wealthface!

What is the best platform for those interested in ESG Trading?

Online Trading platforms are now available for investing and trading. Wealthface is your one-stop solution for everything related to investing. It is a one-stop online investing organization that caters to investors of all types, regardless of their financial situation, geographic region, gender, or age.

Wealthfcae offers low-cost, high-quality investment products and services that are targeted to each type of investor and supplied in a transparent and cost-effective manner.

So, if you’re interested in investing, and ESG investing in particular, online trading platforms, like Wealthface, are the way to go, where you also have the option to invest from your computer or smartphone.

The Bottom Line

If you’re keen on investing in companies that are concerned about leaving a less severe carbon imprint or more justice in the world, ESG investing is a great option for you.

Get into the world of ESG investing and learn how you can invest in a huge array of ESG ETFs and funds to achieve your goal while getting to know the financial benefits of ESG investing and the way ETF grouping is applied.

After setting your goal, it’s time to use an investing platform that allows you to invest at the lowest costs. Visit www.Wealthface.com for more information!

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