An investment strategy known as ESG allows you to invest your money in ways that align with your values and ethics—a win-win for your health and your financial wellness.
Investing your money wisely takes careful thought. It helps to think about long- and short-term risks, rates of return, stock market forecasts, and when you plan to retire (if you haven’t already). These are just a few key factors that play a role in your future financial health.
But concerns about the state of the world may prompt you to consider one more factor: How does my portfolio impact the world more broadly?
Such concerns have sparked a relatively new investment strategy called ESG. That stands for Environmental, Social, and Governance. Also called “sustainable investing,” ESG is based on the belief that companies that care about the planet, that are concerned for other people, and that follow sound business practices tend to perform better than those that don’t. Their principles may play a role in their success by making them more resilient, as well as more caring.
What does ESG mean?
With ESG investing, you want to evaluate companies and sectors not only based on standard investment principles, but also based on these 3 considerations:
- Environmental. Do they try to reduce waste, pollution, and greenhouse gases? Do they try to avoid practices that might harm the planet? Are they developing products or practices that will help solve environmental problems?
- Social. Do they embrace labor rights, human rights, and sound workplace health and safety measures? Do they care about and give back to their communities or society at large?
- Governance. Do they follow all laws, regulations, and standards; have ethical business practices; and run their businesses in ways that support long-term growth?
Why is ESG important?
Many financial experts think that ESG investing not only helps make the world a better place, but it also supports the long-term growth and stability of the economy. That may in part be because this form of investing may support a more sustainable future.
But ESG may be important for another reason: you. If you have concerns about how your investment dollars impact society, the environment, or the economy, ESG offers a potential double win for your health and well-being. Living by your values—the things you care about most deeply—supports better mental and emotional health. So does financial wellness.
How can you get started with ESG investing?
If you’re interested in ESG, here are a couple tips to keep in mind:
- Work with a certified financial planner. Look for a planner who is well-versed in ESG and who is tuned into the sectors and companies that practice it. Ask how these sectors are projected to grow.
Also, if you’re still working, keep in mind that some 401(k) firms don’t allow you to change the investments within your portfolio. You may have to be open to rolling some of your 401(k) funds over into an IRA once or twice a year. This will allow you to change some of your investments to ESG funds. Your planner can guide you on this. - Think about the issues that you care about most. Is it climate change? Try to divest from stocks in fossil fuel companies and invest in green energy firms instead. Is it workers’ rights? Look for companies that have a strong record of protecting those. Is it animal rights? You might want to divest from companies that test on animals. Share the issues that matter most to you with your financial planner. That can help guide you as you shift your money to ESG-friendly sectors.
Can ESG funds perform better than non-ESG funds?
Financial experts report mixed findings when it comes to the returns on ESG funds. However, one review that looked at over 1,000 studies of ESG investments over a 5-year period found that ESG stock portfolios had rates of return equal to or higher than non-ESG portfolios. Other studies suggest ESG, like any type of investing, performs well over time. Bottom line, if you decide to switch to ESG investing, work closely with your planner to track how well your portfolio is doing.
Concerns about social and environmental problems are on the rise. And making the world a better place through ESG is one way to support greater life meaning and purpose. That in turn can lead to better health and well-being—for you and the world.
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References
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This blog was written by Gail Olson, edited by Nora Byrne, and clinically reviewed by Elizabeth Thompson, MPH, RD.
