By Evan Macedo
Recent years have seen an uptick in the desire for more “socially responsible investing,” with individuals and corporations alike focused, more than ever, on environmental, social, and corporate governance (ESG) concerns around where and how their money is spent. The basic idea is to emphasize impact investing which prioritizes financial returns in stocks and companies that foster and support long-term sustainability goals around the environment, the workforce, and ethical business strategies.
Even as some banking institutions and state governments are pushing back on the rise of ESG investing, it’s worth looking at what the companies and stocks that promote ESG concerns stand for and can offer conscientious investors. As with most investment strategies, risk tolerance should be top of mind when looking at the potential benefits and limitations of ESG investing—which may provide more stable returns with a lower downside risk on the whole.
Some financial planners have noted that investors from younger demographics are the primary drivers of this trend, though a case could be made that ESG focused investments are a solid addition toward building a well-diversified portfolio for older investors with established wealth who are looking for more variety in their holdings.
In addition to the reduced market volatility of ESG stocks, recent analysis indicates that the strong leadership, employee culture, and social standing of these companies can lead to superior financial performance over time as well(1). Todd Bridges, head of ESG research and sustainability investing at ESG Book states that, “Over a long-term horizon, regardless of region, there are benefits and better risk-return profiles” for ESG focused investing.
Detractors may point to the fact that there are no universal ESG standards and the presumed stability of high-ESG performing companies is undermined by the constantly changing regulatory thresholds at play. It is also worth noting that there is no long-term data on the financial performance of these companies, with only recent metrics to look at and no definitive understanding of what factors have driven the trends.
Regardless, for conscientious investors, whether just starting out or already with well-established portfolios—talking with a financial planner about different investment models and how ESG forward companies might strengthen your investment strategy is worthwhile. As always, we are here to help answer your questions and see what strategy works best for your goals.
The opinions here are of the authors, and may not reflect those of Lion Street Financial, LLC. Past performance does not guarantee future results.