ESG Stocks for Dummies
A beginner’s guide to start investing in a better future
Greetings my fellow finance enthusiasts! Are you tired of being bombarded with boring finance terms like “dividends” and “bear markets”? Fear not, because today we’re talking about something a little more hip and happening — ESG stocks!
Well, just in: you will still be bombarded with the boring terms, but now you’re more environmentally, socially, and governance-ly aware… and hip.
First thing first, ESG?
ESG stands for Environmental, Social, and Governance. It refers to the three key factors that are considered when assessing the sustainability and ethical impact of an investment. This approach to investing evaluates a company’s impact on the environment, its treatment of employees and stakeholders, and its overall governance practices.
The term ESG was made mainstream when it was coined in a 2004 report by the United Nations, although the concept of ESG itself has been practised somewhere around the 1960s — under the label of socially responsible investing.
In this specific context, you could say that ESG investing is a bit more specific compared to socially responsible investing or ethical investing, since ESG investing focuses on only three key concerns.
What is an ESG Stock?
An ESG stock is a stock (just your normal stock) that has been selected for investment based on its environmental, social, and governance (ESG) performance. The idea behind investing in ESG stocks is to support companies that prioritize sustainability and corporate responsibility. These stocks are believed to offer long-term growth potential while also promoting social and environmental progress.
It’s like the Olympics of investing, where companies are evaluated based on their impact on the environment, their treatment of employees and stakeholders, and their overall governance practices. And just like the Olympics, there are gold, silver, and bronze medalists, or in this case, ESG stocks.
But, unlike the Olympics, these ESG competitions are fought in many arenas, where different stocks are evaluated and listed by different evaluators. Among the companies that provide the list and ratings for these stocks are S&P Global, Refinitiv, MSCI, Bloomberg, Morningstar, and Sustainalytics.
Apart from ESG Stocks…
There are many other instruments for ESG investments, such as ESG mutual funds, ESG Exchange Traded Funds (ETFs), ESG Index Funds, and ESG bonds (green bonds).
Types of ESG Stocks
There are several types of ESG stocks, and it really is up to you to categorize them in the ‘baskets’ you prefer. However, here are some of the most common categorizations of ESG stocks.
Green stocks: Invest in companies involved in clean energy or sustainability-focused industries
Socially responsible stocks: Invest in companies with strong records on human rights, labor practices, and community engagement.
Impact stocks: Invest in companies that have a positive impact on society and the environment.
Carbon stocks: Invest in companies that prioritize reducing carbon emissions.
Diversity & Inclusion stocks: Focus on investing in companies that prioritize diversity and inclusion in their business practice.
Well, these are only a few of these categories, and as you can see, some of them may overlap with others, since it’s grouped according to investors’ preferences, thus, some baskets may have the same stock that is in the others.
How to look for ESG Stocks?
There are generally two most commonly used ways of identifying ESG stocks, either by looking at the companies’ reports themselves, or you could also look at the listings or reports done by third-party companies like the ones done by rating companies mentioned above.
Pros of ESG Stocks
There are many things that you can look forward to in ESG Stocks:
- Supporting companies that are doing good for the world
- Aligning investments with personal values
- Long-term growth potential
- Improved risk management
- Increased corporate accountability
- Potential for higher returns
- Diversifying your portfolio
- Making a positive impact on the world
- Make money while feeling good about yourself.
The downside of ESG Stocks
Well, nothing is all good, or all bad (aside from the shrimp I had yesterday), and neither are ESG stocks. Here are a few concerns raised on ESG stocks:
- Limited options for investment.
- Companies performing in one ESG aspect sometimes oversell their other ESG performances.
- Difficulty in evaluating a company’s ESG performance.
- Lack of standardization in ESG evaluations.
- Limited availability of ESG data.
- Higher costs for ESG Funds, compared to usual funds.
- ESG reporting is not binding on companies.
Keep in Mind
Research before you buy
If you look at companies’ reports, you’ll find these companies so ESG-concerned as if they’re born from mother nature herself. Keep in mind that any company will want to make themselves look good.
It’s good to do your own research and look at whether these companies actually fit into the ESG criteria and rating by external parties.
ESG isn’t always green
ESG is commonly associated with green investments, and many mistakenly think that any stock with an ‘ESG label’ on it is a green stock. If your concern is the environment and saving the planet, you might want to really make sure that the stocks you see as ESG got its ESG label for green reasons.
ESG may perform well, but stocks may not
If you read through reports on ESG investments, you most likely would have stumbled upon the findings that ESG investments perform better than traditional investments.
That’s generally cool, but specifically, you’ll have to look for stocks or funds that can perform better. The statistics that said ESG performs better is general statistics, some stocks or funds might not do as well as their fellow neighbors.
ESG stocks are a growing trend in the investment world and offer a way for individuals to invest in companies that prioritize sustainability and corporate responsibility.
While there are pros and cons to investing in ESG stocks, it is ultimately up to the individual to weigh these factors and make an informed decision about their investments. Whether you’re a seasoned investor or a beginner, considering ESG stocks is a great way to promote positive change while growing your wealth.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.