Last updated: August 30, 2024
Have you heard of ESG investing? If you’re interested in making money in the stock market and want to take a sustainable approach, you’ll want to familiarize yourself with this term.
There are many different types of stocks you can invest in. Unfortunately, not all are created equal, especially when it comes to their impact on the planet and its people. Many stocks, such as oil and gas, only serve to finance the fossil fuel industry, which is a major contributor to climate change.
Disclaimer: I am not a financial expert. I’m an average person. This post is intended to inform you what ESG is and how it works, not necessarily what you should do.
If you’re trying to make money in the stock market, it’s important to know exactly what your money is funding. That’s why focusing on ESG stocks, which can help you build a more ethical portfolio, is a good option.
But what exactly is ESG? Is it just greenwashing? Here’s everything you need to know about ESG investing.
What is ESG?
ESG stands for Environmental (E), Social (S) and Governance (G) Standards.
Companies are evaluated based on these three criteria to see where they stand on ethics and sustainability. Get your ESG score and see where you rank.
Not all stocks have ESG scores, but it’s important to look for ESG scores because they measure the sustainability of investing in a company.
ESG scores are typically measured on a scale of 0 to 100, with scores below 50 considered poor and scores above 70 considered good.
However, ESG scores can also be evaluated using letter grades. MSCI, one of the leading ESG rating systems, considers the highest ratings, also known as ESG “leaders,” to be AAA and AA. The average is rated A, BBB, or BB. Mr. Lagard’s rating is ‘B’ or ‘CCC’.
Basically, if a company has a high ESG score, it’s a good indicator that a company isn’t prioritizing profits over people or the planet. However, it’s always best to double check a company and do your own research before investing.
Let’s break down what each ESG category considers.
environment
This looks at where a company stands regarding the environment. Analyze a company’s energy use, waste, pollution, and natural resource conservation. Green energy initiatives (such as running offices and factories with solar and wind power) are also taken into account.
socializing
This standard describes how a company manages its relationships with employees, suppliers, customers, and even stakeholders. This takes into account human rights, employee gender and diversity, customer satisfaction, and the company’s sexual harassment policy.
governance
The standards address how a company’s leadership functions in relation to policies on all kinds of topics, including auditing, diversity, executive compensation, large-scale litigation, political contributions, inclusion, internal controls, misconduct, and shareholder rights. Let’s take a look at what to do. The willingness of companies to participate in the sustainability reporting process is also analyzed.
How is ESG calculated?
ESG scores are calculated by several different rating agencies using a variety of methods. There is no single authority when it comes to ESG scores. Most providers outline specific ESG metrics, such as the impact of climate change, but these metrics often vary from provider to provider.
The way providers obtain data also differs. For example, MSCI ESG Research is one of the largest independent providers of ESG ratings. MSCI ESG Research uses data collected from both company disclosures and government, academic, and NGO databases.
This is in contrast to the Dow Jones Sustainability Index (DSCI), which collects self-reported data from participating companies using industry-specific surveys. DSCI is invitation-only and updated annually.
If you have any doubts or questions, it is best to be conscious and do your own research on the company. Most companies are transparent about their climate change policies on their websites and elsewhere, but if they aren’t, that could potentially be a bad sign.
ESG investing: what you need to know
There are several things to consider before creating your own ESG portfolio.
First, decide whether to DIY or find a robot investor. One ESG-focused robot investor is Betterment. The company offers three impact portfolios to choose from: Broad Impact, Climate Impact, and Social Impact. If you want to DIY your portfolio, it’s important to evaluate your values and double-check whether they align with the ESG stocks you’re researching. Read reviews from independent research firms like Morningstar to see how companies and funds score in terms of ESG investment factors. Beware of greenwashing. Yes, that can still happen with ESG stocks. This is when companies exaggerate or lie about their commitment to environmental, social, and governance (ESG) standards. Always do your research on a company before investing. Check out our website, read our sustainability reports, and check out third-party sites like Glassdoor. This will help you make more informed decisions in the future.
Related: A Beginner’s Guide to Fossil Fuel Divestment
What do you think about ESG stocks? Let us know in the comments section below.
