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I’ve had a few friends and clients reach out and ask about ESG investing so I wanted to write a blog about its importance in the investing space right now. ESG is an acronym that stands for an approach to investing that focuses on investing only in companies that align with one’s values in terms of the company’s environmental, social, and governance policies. The governance piece is not to be confused with the U.S government, but is more the way that the company governs itself. For instance, do they consistently only promote men over women, are they covertly or overtly corrupt, do they produce a product that doesn’t align with your values? These are all important questions.
Another name for this approach to investing is “socially responsible investing.” When you invest in a company, they use those dollars to carry out their business. So socially responsible investing carries with it the idea that one doesn’t want to be associated with corrupt business practices or products such as companies built on the backs of slave labor in third-world countries.
There are a plethora of options when it comes to ESG investing spanning the entire political spectrum from left to right and focusing on social, environmental, and moral issues. You can invest in what you want to invest in and screen out what you want to screen out.
In the past, ESG was viewed kind of as a charity investment because it was almost understood that you would be sacrificing superior returns in order to make a difference in the world with your investment. As a result, Congress has been leery about allowing explicitly ESG funds in 401(k) plans because of their supposed inferior returns. However, all this has changed when people realized that ESG actually outperformed some other benchmark mutual funds.
When it comes to ESG investing, you don’t have to sacrifice superior returns in order to invest in companies that align with your values. At American Financial Planning we don’t have any funds that we call explicitly ESG, but we are selective in how we build our client portfolios and we help them invest in companies that align with their values and have good business practices. Last year, we had a couple come to us that said they wanted to invest in a particular country, but exclude pharmaceutical companies. We built them an equal-weighted portfolio of 25 different company stocks from that country, excluding pharma. They more than doubled their money in a year. ESG works!*
If you would like to learn more about ESG investing or receive a free investing consultation, contact us at American Financial Planning today.
*Past performance is not indicative of future performance.
Daniel Colston, CFP®