Does Your Financial Advisor Advocate ESG Investing?
You may want your financial advisor to apply the principles of ESG investing in your portfolio.
Environmental, social and governance (ESG) investing principles — also known as sustainable or socially responsible investing — considers more than the monetary return of a particular investment. Advocates of this approach seek to make socially conscious investment choices for their portfolio.
No matter what your political or social views may be, ESG principles affect your portfolio in another important way: Today, corporate social responsibility can exert substantial influence on a given investment vehicle’s ROI.
What Is ESG Investing?
ESG investing means selecting (or avoiding) specific investment vehicles based on an evaluation of how socially responsible they are. Choosing investment vehicles based on ESG principles can be done by positive selection or exclusion.
For example, investors might choose a specific stock because the company actively embodies socially and environmentally responsible principles. Alternatively, many investors choose to actively exclude investments because they violate these principles.
Some of the most commonly targeted industries for exclusion today are firearms and ammunition manufacturers, industries that utilize fossil fuels and those that test on animals. Some investors choose to avoid purchasing the stock of companies whose leadership displays political values opposite their own as well as companies that fail to practice what they consider an acceptable level of corporate social responsibility.
How Do Financial Advisors Use ESG Investment Strategies?
For personal and institutional wealth management clients who express the desire to consider ESG factors in the placement of their funds, financial advisors use a variety of tools to evaluate stocks, funds and other investment vehicles.
Financial advisors may look to one of the many data sources now available for evaluating the sustainability of different investments.
For example, evaluating environmental practices may require looking at a company’s carbon emissivity. To evaluate social responsibility practices, advisors may consider labor management practices and other factors related to human capital. Governance issues concern how effective a firm is at managing itself as well as metrics such as executive compensation and shareholder rights.
Should You Consider ESG Principles for Your Investment Portfolio?
As more Americans become politically active and socially conscious, pressure is increasing on companies to be more responsible. Many investors who make ESG-based portfolio decisions do so because they want to make a positive social and environmental impact while reaping financial returns.
But by doing so, do these investors realize smaller returns on their investments?
Although that may have been the case in years past, just the opposite may be true today. Research indicates that more than 85 percent of millennials are interested in socially responsible investing. Across all age segments, that number is approaching 40 percent.
This means that companies are quickly coming to understand that they must implement corporate social responsibility practices if they want to continue to grow their value to investors. Likewise, as more investors reward ESG practices, companies are realizing that they can enjoy greater success by being socially and environmentally accountable.
Consequently, some ESG-based vehicles may allow you to practice socially responsible investing while also enjoying a hearty ROI.
At Divergent Wealth Advisors, our Certified Financial Planners™ respond to our clients’ individual needs and desires for how we manage their portfolios. If you aspire to be more socially responsible in your investments, we can assist you in identifying the best way to maximize your ROI accordingly. Contact us today to learn more, or to schedule a personalized consultation with one of our knowledgeable and experienced financial advisors.
DISCLAIMER: It is important to note that this information is not meant to provide investment, tax, legal or accounting advice. This material is for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal or accounting advice. You should always consult your own financial planning, tax, legal and accounting advisors before engaging in any transaction.
Approved by Rick Collins, Divergent Wealth Advisors LLC, Chief Compliance Officer 7/6/2018