I used to wonder if it was possible to invest in the stock market and avoid supporting companies that had business models that I didn’t respect. I discovered that I wasn’t the first person out there concerned about investing based on my values when I stumbled upon the environmental, social and governance (ESG) investing space.
You may be more familiar with this concept than you realize. Here are a few basics about how this kind of investing can work, and what to consider if you’re interested.
Which criteria can investors consider?
“Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments,” Investopedia confirms. People focused on screening their investments this way may be interested in the following questions.
- What are the environmental policies that a business follows? These policies could be related to their carbon footprint, where they decide to build a factory, the types of fuel they use to produce their goods or sustainability practices built into the business.
- What are the social policies that a company follows? Are they focused on equality as it relates to gender and wages? Or, does the organization have a zero tolerance policy on actions that may be harmful to others? And have they made it clear in their governing documentation and management style what they believe is harmful to others?
- What is the governance like? Governance is focused on how an organization is run. Is the business ethical? Or, does the company find itself frequently fighting lawsuits because of bad behavior and practices. Or, is the company in the news for mistreating their clientele, employees or communities impacted by their business activities?
These investors can then seek to align their investments with organizations that are aligned with their personal values.
Considerations before you invest
Here are a few actions to consider before beginning an investing journey that incorporates ESG criteria.
Do your research. Investing for your future and growing your wealth takes time. Dedicate time each month toward educating yourself about the ins and outs of investing.
Create a solid financial foundation. You can choose to invest while taking care of other financial responsibilities such as debt and other expenses, but you may invest at lower and higher amounts based on your goals and finances. For instance, I’ve worked very hard to pay off my debt and grow my income in order to invest at a higher rate than before. (Note: There are no guarantees in investing, so don’t invest more than you can afford to lose. And if you have questions or concerns about your personal situation, speak to a certified financial advisor.)
Ask yourself what you care about. Your personal philosophy may be easy to design because it’s related to your core beliefs. For instance, I try to avoid companies that pollute the environment, as well as those that invest in prisons. It’s important for you to be clear about what you want to support and to avoid. Having that clarity will also help guide you as you look at funds to invest in.
Consider your goals. Are you an aggressive investor? Or, do you prefer a slow and steady pace? Determine this and then look into projects that align with your goals. For instance, I set aside one hour a month to review my financial goals, and another hour a month to educate myself on the different financial tools that I’m using to grow my investments for retirement.
How to invest in an ESG fund
Investing your values doesn’t have to be an overwhelming process, and it’s possible to do. Here are some investment tools that you can consider to get started.
Investment apps. There are now self-directed investment apps that have been created to help investors invest in traditional or ESG-focused funds. If you opt to invest via an app such as M1 Finance, Personal Capital or Ellevest, it's important for you to do your research on the ins and outs of investing using the tool.
Traditional brokerage firms. These firms are financial companies that manage investment portfolios for their clients. You can contact these firms, including any you currently use, to see if they offer ESG funds — or if they provide guidance on how to invest with social impact in mind. If you’re using a brokerage firm to handle your investing transactions, you may also be able to set up your portfolio online. If you are passionate about certain issues, ESG investing may be something to consider.