Understanding ESG Investments

Are you interested in investing in ESG stocks, but unsure about the real impact of your investments? While it may be difficult to measure tangible effects like saving polar bears, understanding a company’s ESG score can give investors insight into how they’re performing in terms of environmental, social, and governance factors.

However, interpreting ESG scores can be tricky. Each investor may have their own idea of what constitutes “good” ESG performance. Moreover, ESG scores are often represented in numerical form, which can be difficult to decipher for the average person.

One example of successful ESG intervention involves a major energy drink manufacturer. Though the company initially had an ESG score of 0, they’ve since been able to reduce forced labor in their supply chains thanks to shareholder engagement efforts led by As You Sow, a nonprofit focused on promoting corporate environmental and social responsibility.

While understanding the true impact of ESG investments may not be as straightforward as we’d like it to be, it’s important for investors to stay informed on how companies are performing in terms of these factors. By doing so, we can hold companies accountable for their actions and promote positive change in the business world.

Reducing Forced Labor: A Better Brand and ROI

For companies, reducing forced labor is not only the right thing to do, but it’s also a smart business decision. By implementing new practices, a significant reduction in forced labor can be achieved, which leads to a better brand reputation and return on investment.

Improving ESG Score

Many companies focus on improving their ESG score, which stands for Environmental, Social, and Governance. ESG is a grading system that provides quantitative data that can be used to combat greenwashing. The new practices implemented by companies cause improvements in their ESG score. In fact, one company’s ESG score went from 0 to 26 out of 100.

ESG and Greenwashing

Greenwashing refers to misleading or entirely false claims about positive impact or sustainability. Many automated financial advisers or robo-advisers offer impact portfolios that invest in specific themes like clean energy or donate to charities. However, some of these funds haven’t donated a dollar, leading to confusion.

To combat this confusion, ESG provides quantitative data to measure a company’s environmental, social, and governance performance. While the term “ESG” isn’t regulated, using it can help fight greenwashing.

The Truth About ESG Investing

According to a recent report by KKS Advisors, a sustainability-focused consulting firm, there are currently over 900 funds in the U.S. that market themselves as “ESG” or “sustainable” investments. However, not all of them are living up to their name.

In fact, a study by Business Insider found that roughly two-thirds of these “ESG” funds received a failing grade from MSCI ESG Fundamentals, a research firm that evaluates companies based on their environmental, social and governance practices. MSCI looked beyond just the names of the funds to analyze their holdings and found that many didn’t match up.

This is a common practice known as “greenwashing,” where companies misrepresent how green and socially responsible they are in order to attract socially conscious investors. Unfortunately, this makes it difficult for investors to distinguish between true ESG investments and non-ESG investment products that may be marketed as such.

ESG guidelines, and the people who use them, have led to large-scale reductions in pesticide use, increased sustainability programs and increased diversity within company workforces. Many of those companies also saw increases to their bottom lines alongside the ESG-inspired changes they made. So, yes, ESG does actually create serious, measurable good.

If you’re looking to invest in true ESG opportunities, it’s important to do your research. Look beyond the name of the fund and analyze its holdings and practices to determine if it truly matches your values. While there may not be a dollar-to-net-impact metric just yet, ESG innovations are popping up all the time that help everyday investors make better choices.

New Automatic Feature in ESG Exchange-Traded Funds

According to Alexandra Mihailescu Cichon, Chief Commercial Officer of RepRisk, an ESG data science company, some exchange-traded funds now come with an automatic feature which removes companies that don’t meet set ESG levels. This is a great development for well-intentioned investors who are looking to align their portfolio with their values.

Moving Past Pledges and Into Action

Cichon believes that we are in a stage of transition, moving from the era of commitments and pledges to an era of executing those commitments. It’s time to measure the impact and see whether it creates a positive change. Investors are demanding more from the companies they invest in and this shift towards ESG investing has gained popularity in recent years. Despite the greenwashing and politics surrounding this movement, sustainable investments have seen a massive influx of money.

Don’t Lose Hope

It’s easy to feel overwhelmed amidst trickery and targeted marketing. However, it’s important to keep the faith. With the development of automatic features in ESG exchange-traded funds and increased accountability from companies, sustainable investing is becoming more accessible and attainable for investors who want to make a positive impact.

The Message from Investors: It’s Time for Real Change

Recent events have made it abundantly clear that investors are no longer tolerating business practices that prioritize profit over ethics. The public outrage surrounding these practices has underscored the fact that investors are determined to hold companies accountable until they start implementing real change.

It’s a powerful message—one that has the potential to not only drive positive change but also make a significant impact on our planet. By demanding more transparency and ethical practices, investors can help save not only their portfolios, but also potentially save some polar bears.

At NerdWallet, we believe in the power of informed investing and ethical decision-making. Let’s continue to push for the change we want to see and hold businesses accountable for their actions. Together, we can make a difference.

Alana Benson is a writer at NerdWallet, where she covers the intersection of finance and social responsibility.

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