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What is ESG investing, anyway?

 

I will be honest with you: when I started investing years ago, I did not know what ESG investing really was.

And once I more or less understood what it meant, it did not exactly figure on my list of priorities for many years.

The letters ‘ESG’ stand for Environmental, Social, and Governance. Broadly speaking, when you do ESG investing, you invest and make loans to companies that rank well on environmental, social, and governance issues.

At the beginning of my investing journey, I had never even thought that my personal investments could have an impact on the planet and society.

Back then, I thought that investing successfully just meant maximizing investment performance while minimizing the risks.

And of course, I still think this is important!

But somehow, over the last few years, my perspective has changed.

This is the process I went through:

  • First I went from wanting to invest for the sake of making more money and because I just loooved investing in general

  • Then, after my husband suddenly passed in a traffic accident, I started thinking about investing as the (only) way I could achieve financial security over the long run.

  • And now, I truly believe that investing is THE most powerful tool we have at our disposal to support and protect the planet and society.

And I know what you might think. Something along the lines of:

“This is a pretty bold statement, Aysha!”

Or perhaps something like:

“What a very millennial-like, unrealistic ‘I-want-to-have-an-impact-and-change-the-world’ mindset!”

Well, it could be.

Or maybe there is really something to it.

Here is why.

ESG investing is the right thing to do

Last year, my friend Nadine introduced me to Mette Skjold Rotbøll, co-founder at Think Yellow, an organization that disrupts and creates solutions for the future by adding a Gender Lens.

I was intrigued.


Once we sat down for coffee, Mette went on to explain her journey and the initiatives she and her co-founder Karina Storinggaard were working on.

From investment products that support gender equality all the way to advising companies about how to foster gender equality and awareness in their organization.

It was enlightening.

And then Mette said something that struck a chord with me.

Words that still “live in my memory as fresh as the day they were spoken.”

(Side note: this is a quote Matthew Crawley to Lady Mary Crawley in Downtown Abbey, just before their first kiss ;-) Season 1 Episode 6)

Mette said that “When we have money, we have a responsibility to invest it in a way that is supportive of the planet and society” and in gender equality in particular.

Over the following days, weeks and months, the word ‘responsibility’ regularly occupied my thoughts.

And this is how my perspective changed.

Because it meant that investing was no longer this ‘self-serving’ thing. Instead, investing became something we are required to do for the greater good.

 

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ESG investing makes financial sense

I then embarked on a discovery journey about ESG investing, also known as Socially Responsible Investing (SRI) or sustainable investing.

And here is something else I discovered which brought it home for me:

ESG investments typically have a comparable or better performance than mainstream investments.

In fact, there are many out there (and I am definitely one of them now!) who believe that sustainability investing does result in a better financial performance than traditional investing.

As per a report compiled by Swiss Sustainable Finance:

  • 88% of the research shows that solid ESG practices result in operational outperformance at the companies that implement them (Clark et al., 2015; Friede et al., 2015)

  • 80% of the studies show that stock price performance of companies is positively influenced by excellent sustainability performance (RobecoSAM, 2014; Clark et al., 2015)

  • In particular, many studies highlight a particularly strong correlation between ESG and financial performance for asset classes such as emerging markets, corporate bonds and green real estate (Friede et al., 2015)


And that just makes sense.

Because companies that score high on Environmental, Social and Governance (ESG) tend to make better decisions, employ a more engaged workforce, and innovate more. They also tend to be better at managing risks.

For example, research by the Financial Times in January 2019 determined that global companies that have reduced their carbon footprints the most every year have outperformed those with high carbon footprints.

Similarly, an article by Professor Roberg G. Eccles and Svetlana Limenko from the World Bank published in the Harvard Business Review in May 2019 documents several studies that have demonstrated that companies with high performance on ESG ratings outperform their peers by as much as 40%.

Forty Percent!!!

This is why sustainability investing is not only the right thing to do, it is also a way to maximize financial performance while reducing risk.

Especially when we invest for the long term (which is, by the way, the best way to reduce risks and achieve enhanced returns at the same time!).

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Why ESG investing is perfect for women

Investing in line with our values to support the causes that matter to us simply changes the whole game.

And I really feel that it can go a long way in addressing the barriers that women typically face when it comes to investing:

1. Money is not my thing

Or in other words: “I don’t know much about managing money, and I feel uncomfortable talking about it.”

I hear you.

And if you feel that way, you are definitely not alone.

All I can say is that you try looking at it in another light. Just like Mette told me: if we are fortunate enough to have some money, we have a responsibility towards society to put it to good use.

A responsibility and also an opportunity to help change things in the matters that are dear to our hearts, be it climate change (check!), gender equality (check!!!), or water preservation (check!).

And at the same time, we can build financial security over time for ourselves and our loved ones.


2. I don't trust the banks

There are so many reasons why it is difficult to trust traditional financial institutions.

They have brought on financial crises. We know that most of them are just in it for the money, trying to sell us their expensive, underperforming products while pretending they are in our best interest.

Try telling your banker that you want to invest in a sustainable, low-cost ETF. Chances are he (because it’s very likely a ‘he’ and not a ‘she’) will start making faces and try convincing you why this is a bad idea.

And all of that mainly because the bank (and the bank clerk in front of you) would barely make any money if you start investing with ETFs.

What is worse, a lot of the client facing staff are barely knowledgeable about ETF and passive investing. And most don’t know much at all about ESG investing.

But if you make a conscious effort to invest in line with your values, you will find that modern platforms now exist to help you do just that for a fraction of the cost.

 

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3. My husband/boyfriend takes care of managing my/our money

As a gender equality activist (and I really like this ‘title’ ;-), I believe that a woman should make her own financial decisions and manage her own money.

At the very least, she should be actively involved in managing the money of the family, together with her partner.

Especially since research has shown that women are better investors than men (OBVIOUSLY!). And this is mainly because we typically invest for the long term and take less risk.

But when we add sustainability and impact to the equation, then it is even more critical for women to become active participants in how their money is being managed.

Because chances are that the men in our lives are less aware and less inclined to invest in a way that matters.

And it is our RESPONSIBILITY to ensure that the money we have is invested in a way that supports the planet and the social issues that we care about.


So, still wondering what ESG investing REALLY IS?

ESG investing has gained a lot of traction in the last few years. In fact, many believe it is becoming the primary way institutions and people will invest in the future.

And I certainly hope this will be the case.

Later this month, I will publish another article with more details on the different types of sustainable investments and how to get started with them.

So, if you are eager to learn more about what ESG investing really is, sign up for email updates and stay tuned!

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Check out my list of online robo advisory investment platforms that offer sustainable portfolios:

 

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