Ethical investments: Understanding ESG investing
The investment landscape is changing. When making investment decisions, advisors and investors are now considering social values and ethical options, whether those values center on social responsibility, green efforts, diversity or more. Today, investors can align their values with their portfolios by focusing on environmental, social and corporate governance (ESG) investing.
At the end of last year, Morningstar reported‡ on the record-breaking rise of sustainable portfolio funds in the U.S., which reached $20.6 billion in 2019—four times the amount from 2018. With this increased focus on ethical investing, investors should keep an eye on the opportunities and understand how ESG investing works.
ESG investing allows investors to build portfolios that have a positive impact, align with their specific values and enhance long-term risk/return ratios. While actual fund selections will vary by financial institution, ESG investment portfolios focus on three areas:
- Environmental: weather, water, air, waste management
- Social: data security, human rights, community development
- Governance: company management, fraud, diversity
Inclusion and exclusion
For years, investors have been able to request portfolios that exclude specific goods, services or connections, ranking investments on a negative scale based on whether they engage in, or support, certain screens. Adding to that practice, ESG investments include funds based on the positive impact the company’s environmental, social or governance issues can have on their financial performance. These factors are ranked on a positive scale and each ESG opportunity can vary widely in the spectrum of characteristics, allowing investors flexibility and customization. Bottom line: ESG investing allows investors to customize their approach by excluding and/or including funds based on a values scale.
Understanding ESG myths
1.) Myth: Value-based investments have high fees.
Reality: Fees for socially responsible funds can be high if you are investing independently or are working with an advisor who is unfamiliar with the space. However, a knowledgeable advisor can help reduce fee costs and find fund diversity that isn’t cost prohibitive.
2.) Myth: You give up performance when you select investments based on social metrics.
Reality: Research has shown you do not need to sacrifice return to invest in a portfolio aligned with your values.
3.) Myth: The socially responsible investment universe is too small.
Reality: Funds that cater to social and ethical values have become more and more prevalent in the market.
Aligning investments with lifestyle
ESG portfolios can provide investors a way to align social and ethical values with their investment practices. Increasing demand has helped this investment arena grow significantly in the last few years, with more growth expected. To learn more about your ethical investing options, speak with your financial advisors.
UMB Senior Investment Product Analyst Jennifer Boxberger describe ESG investing
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Jennifer Boxberger and Spencer Berndt