ESG Investing Explained: Aligning Your Portfolio With Your Values
For much of investing history, portfolios were evaluated primarily on one measure: performance. Today, many investors are also interested in understanding what the companies they invest in represent and whether their business practices align with their personal values.
ESG investing provides a framework for evaluating companies beyond traditional financial measures. ESG stands for Environmental, Social, and Governance—three areas that can help investors assess how a company operates, manages certain risks, and approaches its responsibilities to employees, customers, communities, and shareholders.
ESG is often used interchangeably with sustainable investing, but the two are not quite the same. Sustainability is a broader concept focused on meeting current needs while considering the long-term impact on people, resources, and the environment.
ESG is more specifically a framework for evaluating a company’s practices in these areas. It can provide investors with additional information about factors that may affect a company’s long-term operations, risks, and opportunities. In this sense, ESG considerations can complement traditional financial analysis rather than replace it.
What the three letters mean
ESG stands for Environmental, Social, and Governance — three categories of factors that can be considered alongside traditional financial analysis when evaluating an investment.
The environmental dimension looks at how a company affects and manages its relationship with the natural world: its resource use, its emissions, its environmental risks. The social dimension considers how a company treats people, including diversity among its employees, customers, suppliers, and the communities it operates in. The governance dimension examines how a company is run: the quality and independence of its leadership, its transparency, its accountability to shareholders, and its business ethics.
The central idea of ESG investing is simply this: these factors can be examined deliberately, rather than ignored, when deciding what to own. Click here for a brief description of 3 pillars of ESG investing.
Not a new idea — a more refined one
ESG investing did not appear from nowhere. For decades, investors have practiced what was often called socially responsible investing, typically by avoiding industries they did not wish to support. What has changed is sophistication. Where the early approach was largely about exclusion, today's ESG analysis is more nuanced, more data-driven, and more integrated into the broader work of evaluating a company's quality and long-term risks.
ESG is a spectrum, not a switch
Perhaps the most useful thing to understand is that ESG investing is not a single, all-or-nothing decision. It is a spectrum of approaches, and an investor can sit anywhere along it.
Some investors use simple screening — choosing to exclude certain industries or activities from their portfolios. Others favor ESG integration, where these factors are weighed alongside traditional financial metrics in the ordinary course of analysis. Some pursue a thematic approach, intentionally investing in areas such as clean energy or water. And some pursue impact investing, seeking measurable positive outcomes alongside a financial return.
Final Thought
If ESG has been a backburnered concern for you due to not knowing whether you can meet your financial goals both in your retirement plan or other types of investments you may own, we’re happy to explore your options with you. It has been our experience that employer plans do, in fact, have options for socially responsible investments, and we’re currently using them in these plans.
With that clarity, the investment decisions become far more straightforward and more genuinely yours. Investing has always been about the future you are trying to build. ESG investing simply asks that the portfolio reflect not only the future you want for yourself, but something of the world you want to help build along the way.
The Legacy Foundation has invested in the tools that allow us to access the metrics of companies, mutual funds or ETF’s and how they score in each ESG category compared to their peers, giving them a sustainable rating. Because of our independence when choosing investments, we aren’t limited to proprietary investments but rather a universe of choices. We are proud to be a Certified B Corporation®, reflecting our belief that doing well and doing good can go hand in hand. Our certification represents a commitment to considering the impact we have on our clients, our community, and the world around us—and to using our business as a force for positive change.
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Disclaimer:
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes 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