For more than 200 years, long before the advent of modern stock markets and electronic trading, some investors have been committed to socially-responsible (SRI) investingi. This involves choosing companies and products that specifically eschew certain harmful or toxic behaviors.
But over the last few years, this modest SRI movement has blossomed into a committed cross-section of investors who are interested in environmental, social, and governance (ESG) investing. Why the sudden interest in this category of investments, and what should investors know before getting started?
What ESG Means for Investors
Environmental investments include companies interested in fighting climate change and diminishing their carbon footprint. Socially-conscious companies focus on products and services that boost the general good. And governance-minded investments are committed to diversity among executives and management personnel and transparent, non-discriminatory business practices.
Investors may be able to realize a few essential benefits by jumping into the world of ESG products.
Investors need not worry that a commitment to ESG investing means sacrificing high return rates. Companies that are focused on sustainability may consider using their resources as efficiently as possible, boosting revenue and increasing innovation over time. Instead of acting with a singlehanded focus on quarterly profit figures, these companies are looking to the long term to ensure that they can continue to evolve.
Simple, Streamlined Investments
ESG investing doesn't need to be complicated or risky; in fact, you may already own some stocks, ETFs, or other investments correctly classified as ESG. Suppose you are worried about putting all your figurative eggs into one basket. In that case, you may want to look into index funds or ETFs that spread risk across dozens (or even hundreds) of companies dedicated to ESG principles.
What To Look For
Over the past decade, ESG concepts have gone from "nice to have" to an integral part of a company's fiduciary duty to its investors. This means that, when evaluating prospective
investments, investors must look beyond the ESG label to determine whether the company's financials are strong and its outlook is bright.
You will also want to consider how any new ESG investments fit into your overall asset allocation. For instance, if you're someone who is tempted to sell (at a loss) whenever the market drops, you may want investments that don't experience much volatility. Those with a bigger appetite for risk may want to consider purchasing individual stock shares.
Investing involves risks, including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
This article was prepared by WriterAccess.
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A History of Impact Investing (investopedia.com)