Sustainable investing, also known as ESG (Environmental, Social, and Governance) investing, is a powerful approach that allows investors to align their wealth-building ambitions with their personal values and financial goals. Our daily lives are increasingly influenced by global challenges such as social justice, climate change, and corporate governance. Because of that, many investors are seeking ways to ensure their financial choices reflect their values.
That’s where sustainable investing comes into play. This investment approach considers not only financial returns but also the environmental, social, and governance impacts when selecting investments. Unlike traditional investing, which primarily focuses on financial returns above all else, ESG investing evaluates companies based on their adherence to sustainable practices and reporting metrics. This approach seeks to support businesses that are not only profitable but also contribute positively to society and the environment.
HighPoint Advisors, LLC, has been helping clients in Syracuse, NY, as well as the many other markets we serve across the country, find a balance between personal values and investment growth for many years. As a fully independent company, we have the access and experience to help guide investors interested in this type of socially responsible investing.
What Is ESG Investing All About?
Environmental factors consider how companies manage risks and opportunities related to environmental issues, such as climate change, resource depletion, conservation, carbon footprint, water scarcity, energy efficiency, and waste management.
Social factors evaluate a company’s relationships with employees, suppliers, customers, and the communities in which it operates. Examples include labor practices, diversity, human rights, safety and quality controls, and privacy and data security.
Corporate governance involves assessing how a company is managed, including its executive pay, shareholder rights, leadership and board structure, corporate ethics, lobbying activities, accounting practices, and transparency.
A Few Ways to Put ESG Investing to Work
Like most investment approaches, there are multiple ways to utilize sustainable investing. It’s not just about what you own or don’t own, but also how you manage the things you invest in that makes ESG investing special.
- Negative Screening: The process of excluding specific investments in companies or sectors that conflict with your values.
- Positive Screening: The opposite of negative screening. Here, the goal is to seek out companies or investments that both align with your values as well as embody strong ESG practices.
- Integration: Inserting ESG considerations into the very DNA of your investment process. A firm that practices ESG integration doesn’t rely on any one specific method (negative screening, for example), but rather adds an ESG layer or filter to their overall approach.
- Shareholder Activism: This is when either existing or new shareholders use their ownership power to influence a company’s management to improve or implement ESG practices. This is a strong tactic and is widely seen as a way to do good while potentially increasing returns.
- Thematic Investing: Simply stated, this is when you isolate companies or investments that are all targeting one specific area or “ESG theme,” such as waste reduction or data security.
Who Is Sustainable Investing Right For?
ESG investing could be appropriate for anyone under the right circumstances, but logically it seems to be an easier match for the following types of investors:
- Socially Conscious Investors: Those who want to make a positive impact with their investments by supporting companies that contribute positively to societal changes.
- Younger Generations: Much longer time horizons lead some younger investors, such as millennials and Gen-Z investors, toward sustainable investing. Younger investors see ESG issues as a much larger and more present threat to their future, whereas older generations have a shorter timeframe and may see some ESG issues as not a concern of theirs.
- Long-Term Thinkers: ESG factors can help identify companies with sustainable business practices, which would better position them for long-term success.
- Ethical Investors: Investors who prioritize social responsibility and environmental stewardship. Investors with strong beliefs and preferences want to do good in the world while also doing well with their invested wealth.
What Are the Pros and Cons of Sustainable Investing?
Let’s start with some of the potential benefits of sustainable investing:
- Potential for competitive gains: Investing in companies or industries that consistently practice sustainable principles could lead to superior long-term growth, even outperforming some other investment strategies over market cycles.
- Alignment with personal values: ESG investing allows investors to support companies that reflect their ethical beliefs and values while seeking to grow their wealth along the way.
- Risk management: Companies with superior ESG practices and reported metrics may be better positioned to manage risks, which could include avoiding costly corporate controversies or scandals (which may not be discovered by strategies that don’t consider ESG criteria).
- Positive impact: Some investors want their money to make an impact on the world, and sustainable investing can do that by contributing to addressing global challenges while building wealth. Invested dollars can have a direct impact on addressing environmental protection, social equity, and robust corporate board diversity, for example.
Of course, we need to be aware that sustainable investing does have some potential drawbacks, including:
- Lack of data standardization: ESG data reporting is not fully consistent across various providers, and that makes it difficult to get a totally accurate measure of a company’s true impact.
- Limited investment universe: ESG-focused investing may exclude certain sectors or companies, which could potentially limit diversification and investment opportunities.
- Variability of performance: ESG-focused investments may not always perform as well as traditional investments, especially in short-term market environments where certain non-ESG sectors are thriving. An example could be a portfolio aimed to address climate change that lags in returns when the fossil fuel industry is leading the markets.
HighPoint Advisors, LLC, Can Guide You as You Invest
While ESG investing aligns your portfolio with personal values, it’s essential to balance this with your financial goals. Understanding that this approach may have some limitations, it clearly offers a unique opportunity to build wealth while contributing to a more sustainable and equitable future. ESG investing requires careful consideration of your overall financial situation and goals, which is where a qualified advisor can help.
At HighPoint Advisors, LLC, our advisors can help do just that. We work together with clients in Syracuse, NY, and beyond to help them make informed choices that align with their values while pursuing long-term wealth creation. We will tailor an ESG investment approach that meets your ethical preferences while striving to achieve your financial objectives.
Contact us today and tell us how you want your money to make an impact.
Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) has certain risks based on the fact that the criteria exclude securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.