Whether you realize it or not, the way you choose to spend money often correlates to your values and beliefs.
From buying groceries to donating money to shopping, where you choose to spend your money often defines what’s important to you. So, the idea of aligning your portfolio with your values makes sense.
One way to do that is by understanding ESG criteria.
ESG has almost become synonymous with socially responsible investing, but they aren’t quite the same thing. ESG criteria measure a company’s commitment to positively impacting the world, and socially responsible investing is an individual investment strategy that prioritizes investing in companies that embody ESG standards.
ESG has picked up popularity as companies and investors alike put more focus on impactful opportunities.
If you’ve been considering diversifying your portfolio with socially or globally impactful stocks, here’s a quick introduction to ESG criteria.
What Does ESG Mean?
ESG stands for Environmental, Social, and Governance. These make up a set of non-financial factors investors may use to weigh and compare their investment options. There is no universal standard for ESG criteria, though that may change in the future.
Currently, businesses may offer their own sustainability reports and disclosures or follow guidelines determined by independent organizations such as:
- Sustainability Accounting Standards Board (SASB)
- The Global Reporting Initiative (GRI)
- The Task Force on Climate-related Financial Disclosures (TCFD)
ESG criteria are standards for company operations that investors can use to screen investments, to either include or exclude potential opportunities.
While ESG criteria and socially responsible investing have been around for decades, demand for such opportunities has increased due to the coronavirus and the climate change crisis, among other things.
As you think about what’s important to you, a few ESG criteria could include:
Environmental: Low carbon emissions, green energy initiatives, or responsible waste management
Social: Diversity in employees and leaders, fair labor practices, data security, or customer satisfaction
Governance: Diversity in board members, political contributions, or transparency in financesWhy Is ESG Criteria Important?
ESG criteria provide investors essential insights into how a company may (or may not) be well-aligned with your values. This knowledge empowers investors to put their earnings towards companies focused on making a difference—and take a stand against companies that are not.
The rising popularity of ESG investing is creating greater transparency amongst companies. In response, there’s more pressure on companies that may not have been socially or environmentally conscious in the past to start doing better.
More than ever, your investment dollars speak about the impact you wish to have on the world.
How to Analyze ESG Criteria for Your Portfolio
Because ESG investments are growing in popularity, the criteria for them are evolving as well. What was once a hard-to-define idea has become a sophisticated set of data points collected by organizations and sorted for investors.
But the question remains, where do you start?
As I mentioned before, there are a few big names in the world of setting ESG criteria. Because these organizations are considered independent raters, it may be helpful to start there. They can help offer some insights into what criteria are used to score a company and how it’s currently performing. A good number of large financial services companies will offer their own set of ESG criteria as well.
When sorting through potential investment opportunities, note how easily obtainable an ESG score or disclosure is. If you have to search high and low for a company’s social initiatives, they may not be offering the transparency necessary to meet your ESG criteria.
If the process of selecting your own ESG criteria sounds overwhelming and time-consuming, that’s because it certainly can be. If you want to utilize ESG criteria in your investment selections, my team and I can help make it possible.
How ESG and Investing Collide
Adopting investment practices that align with your goals shouldn’t come at the expense of your investment returns. It’s still critical to build a well-diversified portfolio that considers your risk tolerance, time horizon, and investment goals.
There are several ways you can build ESG portfolios. Perhaps you want to prioritize market activity and make a positive ESG impact when possible, or maybe you want to prioritize ESG impact no matter the market performance. It all depends on the broader context and what matters most to you.
Aligning Your Financial Goals & Values
At Brightview Financial, I offer globally diversified portfolio management for tech professionals. If socially responsible investing is a priority for you, we can apply that well-diversified approach to investments already screened for ESG criteria.
Through this approach, we can find the right balance between low-cost investment options with the potential for optimum returns without sacrificing your focus on impactful investing.
This is an exciting time for socially conscious investors, and new opportunities to align your portfolio with your values will likely continue emerging. If this is something you’ve been considering or would be interested in learning more about, feel free to reach out to me any time.