What is Social or Values Investing?
Values Investing, Socially Responsible Investing and ESG investing mean screening investments to either avoid investments in companies that do not share your values or actively invest in companies that promote your values. ESG stands for Environmental, Social and Governance. ESG funds will try to screen out companies who are not up to the fund’s standards on those three criteria. An ESG index fund or ETF will passively reflect an index of ESG companies, usually the MSCI ESG index. Make sure you look at the screens the fund uses to include or exclude companies and make sure it works with your values.
Who is it for and what are the risks?
Anyone invested in the public markets can take advantage of ESG investment opportunities, but always look at what screens the funds use. Decide if you want to screen out certain companies and/or seek out other companies that are actively promoting the values you believe in. Typically, ESG funds are slightly more expensive because they have to develop screens and screen companies. Historically, investors feared lower returns and reduced diversity because whole sectors and especially certain high performing companies would be screened out. Because technology companies have outsized influence in many sectors now, which was not the case when screening increased prominence in the nineties, ESG index funds have beaten the S&P 500 index fund in recent years. However, investors should look at long term returns before making any investment decisions. Decide if the higher expense ratio and/or increased fees are a tradeoff you are willing to take for investing according to your values.
Where do I start?
The first thing to do whenever you are considering changes in your investment strategy is to identify your goals. Sit down and think about your goals with values investing. Think about the specifics like whether you want to encourage companies in the clean air/water sector or maybe you want to actively discourage companies that do not have diverse Boards. Once you’ve identified your goals, start reading! You can start by checking out our resource list for values investing here. Once you feel ready, you may want to start by diversifying a part of your asset allocation to ESG or values investing before making larger allocations. Consider speaking to a financial advisor to get more information.
Your Guide to ESG Investing (Motley Fool)
Click the link above for a comprehensive description of ESG Investing and breakdown of the differences between ESG, SRI (Socially Responsible Investing), Shareholder Activism, Impact Investing, and Conscious Capitalism. It discusses the risk of ESG as well as the risk mitigation inherent in this investing strategy.
Investing in startups without being wealthy (The Balance)
Did ESG Pay off for Fund Investors Last Year? Yes and No. (Morningstar)