What Are The Elements Of ESG Investing?
ESG investing is a busy sector of the current financial world. The process involves building a portfolio with a focus on doing environmental, social, and governance good. If you're curious about this approach, you should talk with an ESG investment advisor about these four aspects of the process.
Active vs. Passive ESG
One of the most immediate questions you'll confront is whether you wish to pursue an active or passive approach to ESG. When an ESG investment firm targets companies actively, it is looking for businesses that are creating the next big changes. Conversely, passive ESG involves investing in businesses that aren't actively making the world worse.
Suppose you're looking for something on the environmental front that's active. You might invest in solar panel producers that are improving efficiency and reducing reliance on hazardous mining practices to get materials.
On the passive side, you might pursue a similar environmental outcome by focusing on companies that aren't expanding their carbon footprints. For example, an accounting firm probably can't revolutionize the environmental impact of its work. However, it can at least avoid adopting the worst-in-class practices of competitors.
The environmental component usually involves concerns about the climate crisis, pollution, or toxic chemicals. An ESG investing advisor would study potential securities for their clients to determine which ones are doing the most. Likewise, they would discourage their clients from investing in businesses that are actively harming the environment, such as natural gas frackers.
Social issues tend to involve the treatment of historically disadvantaged groups. When it comes to investments in developed countries, these usually include issues involving the LGBTQ+ community, racial and religious minorities, and the poor. Investments in emerging economies might focus on avoiding firms that actively facilitate wars and oppression.
An ESG investment firm will want to steer clear of companies that are more PR-focused than serious about social change. They don't want to invest in companies that only post Pride month stuff on their Twitter feeds for their U.S. subsidiaries while conveniently avoiding taking a stance on the treatment of queer people in Saudi Arabia, for example.
Finally, there is the question of driving chance within corporate governance. Executive pay, worker unionization, and promoting historically disadvantaged groups in leadership all feature highly here. An ESG investing advisor doesn't want clients putting money into firms where the CEO makes 300 times what the average worker does, for example.
For more information, contact a local ESG investment firm.