By Jenni Riley, MBA, FPQP™
Investors have become increasingly aware of sustainability issues and want to put their money where their values are. ESG and sustainable investing involves much terminology that can be interpreted differently and continues to increase as the popularity of this subject grows. One could easily get lost, so here is a “road map” of sorts for the most commonly accepted definitions.
- ESG – Refers to Environmental, Social + Governance issues. It is not a separate asset class but can be used to find investments for an individual’s preferences and priorities.
- Environmental (E) – Includes pollution, water, energy efficiency, and climate change.
- Social (S) – includes human rights, gender + diversity, labor standards, and community relations.
- Governance (G) – includes board composition, executive compensation, lobbying, audit structure, and political contributions.
There are different approaches to incorporate your views of ESG into your investing strategies. Sustainable investing emphasizes more material ESG issues, whereas impact investing emphasizes intent to generate measurable impact while seeking a financial return.
Socially responsible investing (SRI) is similar to ESG but can have a different meaning. Professionals use SRI to filter out morally questionable businesses and not necessarily seek opportunities using the ESG factor analysis used in sustainable investing.
Some of the challenges financial professionals have seen when seeking ESG investments:
- Data Quality – ESG is reported primarily by the companies themselves, which can reduce reliability.
- Greenwashing – marketing tactics used to deceptively promote the appearance of being environmentally friendly or portraying their funds as having strong positive ESG outcomes when that is not the strategy’s primary focus.
- Coverage and Consistency – Large companies have more resources to consistently and comprehensively report their ESG metrics, so smaller companies may be overlooked.
There are increasing investment options that have an ESG focus and organizations working to solve the challenges. Investors are finding you don’t always have to choose between values and returns.
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