ESG investing has become popular recently, but this is not the latest trend on Wall Street.
Why ESG investing matters right now
A priority in a changing world
The outbreak of historic health crisis Covid-19, the advocacy of green economy and carbon emission reduction have furthered the prosperity of socially conscious investing.
Nowadays, ESG investing has become a buzzword on Wall Street. Investors believe that a company should not only generate profits but also reward its employees, partners and the community.
To some extent, we all hope that investments we make can become a driving force to change and shape the world.
Young investors into ESG
The new generation of investors has been the mainstream of the future. They want to align their investments with their personal values and invest for their future.
ESG factors have been often taken into account in sustainable investing. Morgan Stanley found that nearly 95% of millennials are interested in sustainable investing and 75% of those believe that sustainable investment decisions can impact climate change policy.
As of the end of the second quarter 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion of assets. In the U.S., assets in sustainable index funds have quadrupled in the last three years and now represent 20% of the total, according to a research report from Morningstar.
High ESG focuses, high returns
The sole purpose of an investment is to make profit.
Asset management start-up Arabesque found that S&P 500 companies in the top quintile for ESG outperformed those in the bottom quintile by more than 25% between 2014 and 2018.
ESG provides another aspect for investors to pick good stocks. One theory is that the implementation of long-term ESG projects by a company is a manifestation of its company strength, including leadership, finance, execution, and moral levels. If a company can achieve long-term social initiatives while maintaining strong operating performances, it will be more competitive among its peers.
Risks of ESG investing
No one-size-fits-all standards
There are no agreed-upon standards for evaluating ESG performances.Each institution formulates the evaluation system based on its own considerations that most companies won’t pass every test.
The inconsistency of standards from different investors will only increase the amount of due diligence needed, adding more research time. For example, a tobacco company may be rated as an ESG company, because it gained a high ESG score for job creation contribution to the community, which may misalign with your values such as prioritising your investments in a health-friendly, low-carbon emission company.
Lack of long-term financial performance data
ESG investing has boomed in recent years. Although some researches showed that ESG investing brought above-average returns, itcan’t speak for the future long-term performance.
ESG investing standards will require to go through an amount of trial and error to reach a point where its track records can be proven.
How to invest in ESG stocks and funds
There are two common ways to dive into ESG investing.
1. Invest directly in ESG-specific stocks.
Generally speaking, when a company initiates its ESG plan, it outlines measurable goals and progress, which can be announced in their regular reports.
2. Purchase ESG-related funds, including mutual funds and ETFs.
You can obtain this information from the fund issuer's website. Usually, the funds will contain the keyword "ESG" so that you can easily filter them out.
If you still feel a bit complicated, you can check the featured concept 「$ESG Concept(BK2571.US)$」, which is just a collection of some ESG-related stocks and shall not be considered as an investment reference. When making any investment decisions, the importance of due diligence cannot be overlooked.
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