For many people, investing is about more than preparing for the future or growing wealth. It’s a way to support companies with good business practices and make a positive impact in the world. Taking an environmental, social and corporate governance (ESG) or sustainable approach gives investors the chance to influence issues of personal importance, but a growing body of evidence also suggests that companies focused on ESG criteria perform better, providing an opportunity for higher returns.
To understand why investors are embracing ESG investing, you have to first understand what constitutes an ESG investment. According to Rick Frevert, portfolio manager, First National Bank, when a business is aligned to ESG principles, they typically demonstrate a higher level of transparency.
“Companies that have open and transparent policies are conscientious about the impacts they are having on their communities, and create healthy work environments for their employees. As a result, they are more likely to be perceived as ESG-friendly companies and thus rank higher by ESG investors,” said Frevert.
This transparency regarding a company’s ESG-related practices is important as it allows investors to align their portfolio for competitive returns while supporting important issues.
A company that is focused on ESG factors may have a long-term perspective with regards to relationships and profits. For many investors, the opportunity to create positive change is a reward in itself, and ESG investments have been shown to help communities and society overall.
“Investing in ESG strategies can improve communities in several ways,” said Frevert. “Especially if you look at companies in emerging markets, for example, where they have different regulations or may have communities in need of basic things like clean water or improved infrastructure. Investing in companies that are making a big impact in those areas can really benefit those communities.”
ESG criteria are also important for identifying future-ready companies, those best prepared to withstand market and social volatility. By aligning their portfolios to relevant principles, investors may be positioning themselves for better returns, while having a chance to take a stand on issues of importance to their own personal ethics.
Because of the breadth of information required to select a strong ESG portfolio, investors alone may not find it easy to evaluate a company on its sustainability initiatives. This is where a wealth management advisor can help. If ESG investing appeals to you, contacting a wealth management professional is a good first step toward realigning your portfolio to strong environmental, social and governance standards.