Women Owned Businesses Toss Everything You Know About ESG Investing on its Head
As environmental, social and governance (ESG) investing is taking hold, some investors are placing their money on businesses that mirror their moral and ethical compass. One such example is gender diversity at corporate leadership levels in women owned businesses.
Financial advisors are fielding many questions about what ESG investing will do to their portfolios. Fear about performance means some investors have been slow to accept feelgood investing. To get a better handle on that fear, these descriptions should help you decipher the terminology and see if there is an ESG based investment that you might feel strongly about.
How do I know what’s best for me?
There are many catch-all terms used to describe feelgood investing like ESG, SRI, impact investing, sustainable investing, investing with your values and single-issue investing. To help you decipher some of these overlapping terms, here are some quick facts about each one:
- Socially responsible investing (SRI): SRI investing seeks to avoid harm. Typically, companies are excluded in portfolio funds based on social, religious, moral or ethical criteria such as those companies that derive revenue from alcohol, tobacco, gambling, firearms and other “sin stocks”. These exclusionary ideals are sometimes at the heart of investor fears about investing in their values. For some, the idea of being exclusionary suggests a limiting factor that flies in the face of portfolio diversity.
- Environmental, social and governance (ESG): These include companies that act as good stewards of the environment, social welfare and relationships, and responsible company operations and leadership. Examples of criteria include a company’s carbon footprint, water use and conservation, diversity policies, anticorruption practices, human rights efforts, community partnership and executive compensation and shareholder rights.
- Impact investing: Includes funds from organizations that generate a measurable social and/or environmental benefit and financial return. Similar to SRI, rather than adopting avoidance as a strategy, it pursues investments that make a positive impact and often involving the donation of some of the fees to a nonprofit.
- Sustainable investing: An investment process that integrates ESG and impact investing factors. The idea behind sustainable investing is that companies can and should be the harbinger for social change through their business practices related to diversity, governance and environmental impact. But some say businesses should focus their energy on making a profit instead of advancing a confusing, ill-defined set of goals.
- Single-issue investing: Just like it sounds, single-issue investing concentrates on single issues rather than the larger ESG strategies. This strategy can be an inexact science for investors, for example, because a company that may be leaders in gender diversity and women’s issues might not do as well in other ESG areas.
Are returns really on par with traditional investment strategies?
Many investors often generalize that responsible investing will cost them money in the end. But that taboo is slowly fading as research, data, institutional mandates, improved technology and new products show that adopting these feelgood investing strategies can potentially help portfolios perform better, and often with less volatility.
ESG and SRI investing are part of recent trends toward feelgood investing. Some funds include investments that fit a specific social, environmental or governance criteria. Others are based upon moral, value-based criteria. With so many to choose from and more offerings on the way, it’s clear these funds are growing in popularity. Here is a look at some of the more popular ESG options:
These focus on companies that display greater gender diversity in senior leadership than other companies in their sector, including women owned businesses. Academic research has shown for years that more diverse teams perform better than homogenous teams.
These indexes focus placed on companies that support equality of lesbian, gay, bisexual and transgender employees in the workplace. These funds use the Human Rights Campaign Foundation’s corporate equality index, among other factors. Many firms that are actively engaged in shareholder advocacy of LGBT issues do so in conjunction with other ESG and impact initiatives.
They focus on faith-based values that have a positive impact on the world such as biblical values and social responsibility as well as funds specific to Catholicism and Protestantism. There are also ETFs that support Israel based companies and Islamic principles and companies. Much like the other ESG funds, they seek to provide investors with options for supporting their values.
These funds are often surrounded in patriotism and duty to the U.S. They include indexes that support policies, practices and employment of US veterans, service members and their families. Focus is made on those companies that offer training and professional development initiatives for US veterans and indexes also often include aerospace and defense companies.
At their very core, a nonprofit’s mission is to enact social change. These funds are aligned with nonprofits and their single missions. Focus is placed on collaboration with nonprofit organizations who help set the qualifications for companies in the fund. Though relatively new, nonprofits are expected to run the gamut from NAACP, YWCA, Habitat for Humanity and the American Heart Association. Investing in these funds offers investors legitimacy to their selection of social issues as some of the fees are donated to the nonprofit organization.
With the increasing popularity of ESG investing, investors are placing their money on businesses that mirror their moral and ethical views. What that looks like for different people offers a wide range of possibilities. One thing is clear, however, now more than ever investors can invest according to their personal beliefs without sacrificing returns.
Socially responsible investing involves the exclusion of certain securities for nonfinancial reasons. This may result in the investor forgoing some market opportunities that may have been available to those not subject to such criteria. There is no guarantee that any investment goal will be met.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (972) 931-3818 or at email@example.com.
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