Aligning Your Portfolio With Environmental Governance Principles

Embracing sustainability presents an opportunity for asset managers to create new value propositions for investors. This includes building portfolios that are resilient to both physical climate change risks and the transition to a low carbon economy.

Investors using an ESG approach often follow a positive inclusion strategy that focuses on specific issues they care about. Some investors may also screen for ESG factors when selecting managers.

1. Climate Change

Increasing awareness about climate change is driving investors and lenders to seek out sustainable companies that prioritize ESG policies. These companies are more likely to focus on carbon emission reductions, water conservation efforts, and sourcing renewable energy.

In addition, companies that prioritize ESG are more likely to adopt green bonds and support carbon pricing initiatives. These initiatives can lead to greater emissions reductions at both the national and global levels.

ESG investing can be done through a number of different vehicles, including mutual funds and exchange-traded funds (ETFs). It is also possible to work with a financial adviser or robo-advisor that offers sustainable investment options. A specialist in this area can help you develop an ESG portfolio that aligns with your goals and values.

2. Water

ESG investing may also take into account how a company’s business practices can affect the environment, such as encouraging employees to ride bikes or carpool to work. It might also prioritize companies that use renewable energy to power their businesses.

Socially responsible investing (SRI) strategies tend to be more about what a fund doesn’t own rather than what it does, though. Early funds tended to simply exclude tobacco, alcohol and gambling stocks and more recently, some funds have opted to snub companies that engage in controversial industries such as thermal coal or weapons production.

Investors could be drawn away from ESG investments if the data starts to show that these companies aren’t as resilient as once thought. But in the meantime, they’re becoming increasingly popular among younger investors who want to see their money do good.

3. Waste

While the ESG movement is gaining in popularity, the field isn’t without its challenges. For example, some funds may use their ESG-friendly name as a marketing tool rather than to further the company’s mission. That’s called greenwashing and can obscure the real impact of a company’s practices on the environment.

Incorporating ESG practices helps to attract potential customers, lenders and investors who care about the environment. It also gives companies a competitive advantage over businesses that don’t take sustainability seriously. Plus, research shows that employees who work for environmentally responsible companies are happier and more productive.

4. Human Rights

Investors want companies to be open about their carbon emissions, environmental damage and the impact on people. They also want companies to disclose how they’re addressing social issues such as sex discrimination, labor management and business ethics.

Some investors push companies on ESG issues by voting at annual shareholder meetings. They ask CEOs for more details on climate change, measurements on how their activities affect human rights and audits for racial equity.

While some critics accuse ESG investing of greenwashing, others say consideration of these factors is part of fiduciary duty for companies. And they argue that ESG investing is helping to produce competitive investment returns. Investors who want to try ESG investing have a number of options, including incorporating sustainable funds into their 401(k) accounts and choosing investments through robo-advisors that offer ESG options.

5. Diversity

As humans, we depend on biodiversity for our survival. Biodiversity is also critical from an economic perspective—it increases crop genetic yields, enhances tree growth and improves livestock feed. It also helps stabilize climate fluctuations and moderates weather extremes.

Diversity is highest in a band around the equator, with hotspots containing unique ecological composition and priceless evolutionary information. These ecosystems need to remain intact to preserve biodiversity, moderate the climate and support human well-being.

There are a variety of ways to invest in companies that adhere to ESG criteria, including ESG mutual funds and exchange-traded funds (ETFs), green bonds and impact investing funds. However, it’s important to research each investment option before making a decision. Be sure to read through all disclosures, which can include ESG-related factors and metrics.