76: Build Wealth and Make an Impact With ESG Investing

If there’s one thing we know about today’s business owners and entrepreneurs, it’s that they’re breaking the mold. They’re not doing business like previous generations, and they’re using their money, products, and services to make the world a better place. That translates into more than just how they make their money; it bleeds into how they invest, as well. More and more Millennials, Gen Z’ers, and even Baby Boomers are choosing to invest in socially responsible businesses and to be “selective” with the mutual funds and stocks they choose to put their money into.

We also see this in our own financial planning practice, where more and more of our clients want to know how they can invest in businesses that aren’t “evil” or trashing the planet. In today’s episode of Worth It, we’re talking all about ESG investing: what it means, what it entails, and how you can grow your wealth with it.

WHAT YOU’LL LEARN

1:19 Why Millennials are the generation leading the charge on responsible business

2:23 What ESG stands for

2:50 How Erin Brockovich can teach us about ESG investing

4:51 The focus that previous generations of businesses put on profit over health and safety

5:46 How Enron and businesses like it have scared people away from investing

6:06 The environmental criteria of ESG funds

6:14 What “social criteria” means for ESGs

6:24 The governance criteria for ESGs

8:17 The steps you can take to start investing in ESGs

8:38 How negative vs. positive screening works

9:04 How shareholders can affect change from the inside out

9:19 The definition of impact investing

 

WHAT ‘ESG’ MEANS

‘ESG’ stands for environmental, social, and governance. ESG investing means that you’re buying funds or individual stocks that are offered by companies that follow strict ESG standards. For example, the environmental criteria for ESG funds dictate how a company must operate as a steward of nature. They can’t pollute water sources or dump tons of trash into the ocean. The social criteria mandates how a company manages relationships with employees, suppliers, the communities in which it operates, etc. There will be no child labor, lack of benefits, or discrimination in companies that qualify for ESG standards. And finally, governance covers how a company’s leadership operates. This includes their executive pay, how internal audits work, clear shareholder rights, and more. When companies abide by ESG, there is less risk of fraud, corruption, and generally shady activity.

Because these businesses have higher ethical and sustainability standards, a lot of investors find them appealing. It feels good knowing that you’re not backing a corrupt corporation that is ruining the planet or doing whatever it takes to turn a profit. So how do you get into ESG investing?

 

APPROACHES TO ESG INVESTING

The best first step to take when you want to start responsibly investing is to talk to a CERTIFIED FINANCIAL PLANNER ™. Planners can help you choose a mutual fund or exchange-traded fund that includes ESG businesses. They can also handpick out ones that don’t help you meet your financial goals. Pretty helpful, eh?

But there are also other options for socially conscious investing that don’t take a “traditional” ESG route:

• You can purchase “regular” stocks or funds, with the intention of influencing change. When you invest, you still want to watch your wealth grow. Investing in more established businesses and “traditional” funds is a great way to do that, but many people (like you) don’t want to invest in companies that aren’t socially or environmentally aware. But here’s the cool thing: businesses are driven by their shareholders. When enough shareholders want to see change, businesses listen. There have been major shareholder-led changes to many companies, including forcing out an old board of directors, driving policy changes, and more — all because shareholders made their wishes clear.

 

• You can focus on impact investing. Some companies offer special stocks or funds that allow them to address a certain social or environmental need. These funds are “released” for shareholders to invest in so that a specific project can get necessary capital. The investor can expect a return on investment, but they also fund a project that aligns with their values. For example, Apple has released funds to help them support women-led solar panel projects for their new facilities, allowing shareholders to support these efforts while also investing in a fund that will offer returns.

 

Those all sound pretty great, right? So what’s stopping you — and other people — from investing more in ESGs? Mostly because there’s still some confusion on how much ROI you make on these investments.

 

GROWTH AND ROI IN ESG INVESTING

As we discuss in the episode, ESG investing is just starting to get its (much deserved) time in the spotlight. Even 15% of Baby Boomers are interested in ESG, but females, Millennial, and Gen Z’ers lead the charge on ESG demand. Unfortunately, the statistics show that only 29% of advisors are using ESG in their portfolios. So why’s there such a discrepancy between the apparent supply and demand?

At the end of the day, people still want to make money and ESG is a fairly new ball game. People may have concerns that an ESG fund or a socially minded business aren’t going to have the same profit and shareholder dividends. They may also have concerns that there is a glass ceiling of sorts, making it so ESG businesses won’t see the rapid growth or long-term status that more traditional businesses do. As a result, they may “dabble” in ESGs, but they still hold the majority of their investments in “traditional” funds.

But the numbers don’t lie. A lot of studies show that not only do ESG companies perform well, but that in some cases they do better. Because they have sound policies that lower cost capital and offer stronger transparency, there is more room for growth and lower odds of risk. That means steadier growth without “crises” like Enron, BP, and other companies have caused.

Lastly, most of these funds are tracked on the MSCI KLD-400 Social Index (an index is a metric that tracks the performance of a group of stocks), which has slightly outperformed the S&P 500 over the last 10 years — and with slightly less volatility. This is great news for socially minded investors who have a moderate to conservative approach to investment risk, but who still want to make money by investing in decent companies.

 

HOW TO GET STARTED

Are you ready to start investing in ESGs yet? If so, talk to your advisor. If you don’t have an advisor yet, find one. Also note that some don’t offer ESG funds, but they will when you ask. CERTIFIED FINANCIAL PLANNER™ professionals have a way of “figuring things out,” and they’ll do what they can to find the funds that align with your financial and personal values. Your request will also help them offer a new service to all their clients, so it’s kinda like you’re helping them out.

Advisors can help you find mutual and ETF funds that include ESG-compliant businesses, but they can also recommend certain funds by leveraging what we in the biz call negative and positive screening.

Negative and positive screening is, essentially, handpicking stocks or funds that align with your financial goals, but that also abide by ESG regulations. A CERTIFIED FINANCIAL PLANNER™ with the right experience can also take out the funds that aren’t reflective of your financial goals or social or environmental principles. Because most ESGs come in a mutual fund or ETF, you’ll want an expert on your side who can actually pull out the right stocks or funds.

 

ASK FOR WHAT YOU WANT

The main facts we want you to take away from this episode are that 1.) ESGs exist and are a great investment option, and 2.) The more you invest in ESGs, the more other businesses will take notice. It’s all about the supply and demand; the more we as investors ask for ESGs, the more advisors (and businesses) will take notice. You can effect change with your dollars, not just by investing in a few ESGs, but simply by making the choice to invest in companies that hold themselves to higher standards. Other companies will fall in line, which in turn makes the world a better place. Pretty cool, right?

 

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Have questions about ESGs? Let us know. We’re excited about these funds and we want to help you influence change in the world. And if you’re ready to start investing in ESGs with the help of a CERTIFIED PLANNER PROFESSIONAL™ (or two), check out the quiz below to see if we’re a good fit.

 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

RESOURCES & PEOPLE MENTIONED

• MSCI KLD-400 Social Index
• The Toujours Planning Quiz — are we a good fit for your financial planning needs?

 

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