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What does ESG mean to investors?

Aug 12, 2022 | Research

There are many ways to lead a greener life. You could purchase an electric car, forgo single use plastic, or keep a close eye on your carbon footprint. Additionally, there are ways you can promote social transformations like taking an active role in fostering communities, supporting social justice campaigns, and holding businesses accountable for their actions. But you may not know that you can also foster positive change with your wallet.

Each time you buy a stock, you are supporting a specific company. As such, you can choose to support companies that share your beliefs and take action to promote sustainability, equality, and accountability. These types of companies are often referred to as Environmental, Social, and Governance [ESG] investments.

What kinds of companies are considered ESG investments?

When you think of environmentally and socially responsible companies, you may picture firms that manufacture solar panels, or those whose main purpose is to fight injustice. However, there are many companies that may not immediately come to mind that perform well on ESG issues.

ESG investing doesn’t relegate you to selecting only companies whose mission is directly related to environmentalism, social justice, or governance. Instead, it means looking at a company’s commitment to ESG factors, their principals, and their actions. A company in any industry that is actively working to reduce their carbon footprint, improve their hiring practices, or commit to transparency can be an ESG investment.

For a company to be included in an ESG-focused portfolio, it would need to perform well in one or more of the following categories.

Promoting Environmental Preservation – These companies often have corporate policies addressing climate change, managing emissions, and minimizing their carbon footprint. In addition to policies, these firms must take action to back up their claims.

Exceling in Social Responsibility – These companies excel through promoting beneficial relationships with employees, suppliers, customers, and communities. A company that excels in social responsibility would foster positive outcomes for all stakeholders and work to minimize unjust or detrimental practices.

Having a Strong Governance Track Record – Governance includes factors like leadership, executive pay, audits, internal controls, and shareholder rights. Firms that perform well in this category promote transparency and fairness.

Do companies with strong ESG scores make good investments?

Oftentimes promoting positive change comes with personal sacrifice. In keeping with this stereotype, many incorrectly assume that investing in companies with high ESG performance will require them to sacrifice returns. Fortunately for investors, this doesn’t always hold true.

For example, 50% of sustainable funds – those that use ESG criteria in selecting their investments – outperformed their benchmarks in 2021. While returns in any given year can vary, longer term performance suggests the same pattern. Over a 3-year period, 63% of sustainable funds outperformed their benchmark. This goes to show that investing in companies that promote positive change is one area where you do good without sacrificing for your beliefs.

How To Support ESG Initiatives

A 2022 Gallup poll showed that 48% of investors are interested in sustainable investment options, but many are unsure where to begin. Often, investors lack the time or capability to research each stock to ensure the company’s actions align with their beliefs. That’s where an experienced wealth manager can help.

A wealth manager can work with you to understand your goals and then craft a portfolio designed to help you achieve them. However, many wealth managers use cookie cutter portfolios that are unable to adapt to differing investment preferences. Investors who are serviced by these types of advisors often don’t know which companies they own or how those companies perform on ESG issues.

The good news is there are wealth managers that can design a completely customized portfolio. With this level of personalization, you can ensure your funds support companies that share your beliefs. In the past, this level of customization was reserved for the very wealthy, but with Investing Gameplan™ by DreamWork Financial Group, You Don’t Have to Be Wealthy to Have Wealth Management®.

Invest in What Matters to You with Investing Gameplan™ By DreamWork Financial Group

Investing Gameplan™ by DreamWork Financial Group is an innovative wealth management program that is open to all investors, regardless of their account balance. At DreamWork, your portfolio manager is your advisor, so you have a personal relationship with the person choosing your investments. This structure ensures that your voice is heard if you have preferences for companies you want to support.

At DreamWork, our advisors are fiduciaries, meaning they are legally obligated to act in your best interest – all the time. To make that possible, our compensation structure eliminates conflicts of interest and ensures that we make more money when you make more money.

To learn more about our philosophy or to get started with Investing Gameplan™, contact us today.