You might be wondering, what is ethical investing? Ethical investing is investing in sustainable companies that line up with your morals and values. For example, if you are against animal cruelty, you would invest in companies that make cruelty-free products. To know that the company you’re interested in investing aligns with your values, research is a must: In the past couple years, many companies, like Zara and Apple, have been exposed of exploiting labor and resources. According to different sources, Zara and other fast fashion brands have been accused of exploiting workers in Bangladesh. Additionally, Apple and other tech giants have been accused of illegally exploiting minerals and labor from Congo. With more corporations thriving from unethical practices, what changes can we make to reduce this? As student investors, most of us are just beginning to build our portfolio. This means we have the choice to implement ethical investing from the start by putting our money into the right companies.
What is ESG investing?
Environmental, Social, and Governance (ESG) is a metric used to assess how sustainable a company is. According to Conservice ESG, the environmental criteria can be evaluated through measuring a company’s carbon or toxic emissions, water usage, and waste of different types of resources. Social criteria can include subjects like labor management, worker safety training, and supply chain labor standards. Governance criteria can include business ethics, accounting principles, and executive compensation.
If you’re feeling overwhelmed by this, don’t worry. You don’t have to evaluate all this by yourself. There are simpler ways to assess ESG-friendly companies offered by various platforms. According to one option, Simply Sustainable, “companies are evaluated based on publicly available information such as media sources and annual reports, with scores given for each material ‘E’, ‘S’, and ‘G’ topic, alongside an overall score.” These scores help investors decide if they should put their money into a particular company. ESG scores can be found from different platforms like Bloomberg ESG, MSCI ESG, and Yahoo Finance. You can also read ESG reports released by companies to perceive what ethical practices they have been implementing. However, before jumping into research, you should probably learn how to read ESG scores. ESG scores are assessed on a scale of 0 to 100, where a score above 50 indicates the company is performing better ethical practices than others. In short, the higher the score the more sustainable a company is.
As students, doing research on a single company one at a time can be time consuming. If you’re goal is to invest in a bunch of ethical options with minimum research, then ESG funds are what you’re looking for. Most funds are a basket full of various types of assets put into a single investment option. They can be a great initial investment, because they help diversify the portfolio and overall risk. However, remember to do some research before making any decisions.
Pros and Cons of ESG
ESG investing has been around since 1960s, yet it started to gain more importance after COVID-19. An increasing number of investors are moving toward ethical investing, which is a good thing, but it’s also important to know the pros and cons of ESG investing. According to Design My Report, a few positives of ESG investing are that it can give high returns, have a positive impact, have reduced risk, and improve corporate behaviour. ESG investing can give higher returns in the long-term, it argues, because companies that stick to sustainable values are more likely to mitigate risk. On the other hand, if you were to invest in a company that is unethical, you would be exposed to more risks. Also, if more people take part in ESG investing, this can encourage companies to practice improved corporate behaviour. A few negatives listed by Design My Report are limited investment opportunities, a potential for lower returns, and a lack of standardization. If you’re looking to diversify your portfolio but only want to invest in ESG-friendly companies then you might have limited options, as many industries rely on unethical practices to keep their business going. Plus, if you’re looking to invest in “small cap” companies, companies that have smaller capitalization so not a lot of money invested in them, then they might not have the proper requirements to be considered for the ESG criteria. Moreover, some investors believe that ESG investing is not profitable, because they believe companies would have to spend more money to implement ethical practices. This would affect the company’s net income, generating lower returns for investors. Additionally, ESG is not standardized, which means that ESG scores can vary from one investing tool to another. This can be a problem for ethical investors, especially if you’re thinking of investing in ESG funds, because you may not be aware if an unethical company is put into the ESG criteria.
Generically, in the times we’re living now, creating sustainable practices based on your values can be very beneficial for yourself and the environment. That said, you can implement these practices in your daily life and by ethically investing, because what matters the most in the end is reaching your goals, one way or the other.