Environmental, Social & Governance (ESG) investing may not be perfect, but it’s still on the right path toward a more sustainable investment

It may seem to not make a significant difference right now, but with more responsible investors coming in, even as we speak, it surely will in the future.

If you ever plan to invest in the stock market, do consider investing through the Environmental, Social, and Governance (ESG) investment portfolios, a.k.a. Responsible Investing.

Sure, there may be greenwashing here and there to fool investors; whereby companies or businesses make their product, policy, activity, etc., appear to be more socially responsible and environmentally friendly than it really is, but… it’s a start…

So what are Environmental, Social, and Governance (ESG) criteria?

As described by Investopedia, the ESG criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly.

Many mutual funds, brokerage firms, and robo-advisors now offer investment products that employ ESG criteria.

ESG criteria can also help investors avoid investment losses when companies engaged in risky or unethical practices are held accountable.

However, the rapid growth of ESG investment funds in recent years has also led to claims that companies have been insincere or misleading in touting their ESG accomplishments.

Watch this video to get an even clearer picture about ESG:

Why does ESG criteria matter?

StashAway, a digital wealth management company, explains it this way:

The Environment criteria assess how a company handles its waste, resources, and environmental impact, such as its carbon footprint. An environmentally sustainable company is more likely to be resource-efficient and accountable for its impact on the environment, which also helps it gain public confidence. As the world pivots towards more climate-friendly policies, circular economies, and sustainable development, these companies are also more likely to thrive in the long run.

The Social criteria assess how a company interacts with its communities. A socially responsible company would be expected to treat its employees fairly, source fair labour, maintain proper working conditions, and have diversity policies. Organizations impact the livelihoods of whole communities and are more likely to thrive when those who come into contact with them – whether as customers or employees – are fairly treated. This has multiple trickle-down benefits that affect a company’s bottom line: from higher employee retention rates to strong community and industry representation.

The Governance criteria assess a company’s framework for decision-making and legal compliance. Strong governance ensures that companies distribute their resources fairly, deal appropriately with bribery or fraud, and avoid conflicts of interest at the board level. Companies with robust governance are more likely to practice fairness and transparency across the organization and be more stable in the long term.

How does ESG investing make a difference?

By us choosing to invest more in ESG stocks over alternatives; as more and more companies and organizations get on board and complete to score the highest ESG ratings, it encourages and drives change in others in order to sustain their businesses.

The ESG integration may be in its early stages, but it’s also evolving through time to be more of what it really should be. So just because ESG investing may not be perfect, it doesn’t mean it isn’t worth starting our journey toward making more sustainable investments while encouraging companies and businesses to do the same.

How do I invest in ESG?

These days, with all the technological advancements, we can now start ESG investing in the stock market through mobile apps like IMPACT by Interactive Brokers and/or StashAway. We can even buy fractional shares as low as $1-$10 if total shares are too expensive.

I personally invest in the US stock market by choosing highly rated ESG rated companies through Interactive Broker and also through StashAway Malaysia.

Though StashAway has its own Responsible Investing ESG portfolio set up for investors, I don’t use it because there are companies and sectors within that portfolio that I don’t believe, in my book, pass the ESG criteria. This, of course, is not StashAway’s fault; it’s just the way most ETFs (Exchange Traded Fund) are in the stock market, so we will have to do a little research ourselves to make our own selections based on our own personal insights and investment philosophy.

With that in mind, I manually created my own set of ETF by extracting sectors from the SPDR S&P 500 ETF within StashAway through its Flexible Portfolio. I then renamed my portfolio as SPDR S&P 500 ETF: Tech+Com+Fin Sector as I’m only investing in the Technology (XLK), Communications (XLC) and Financial (XLF) sectors with allocated investment percentage for each sector and removed the rest to minimize damage that my investment can cause to the environment and animals.

I’m also okay to invest in just the above 3 sectors because it’s where most of the investment returns are coming from anyway. The Technology sector has Apple, Microsoft, Nvidia etc. The Communications sector has Alphabet (Google), Meta (Facebook), Activision etc. And the Financial sector has BankAmerica Corp, Citigroup, JPMorgan Chase, Warren Buffett’s Berkshire Hathaway etc. So that’s really good enough for me.

You can either do the same by referring to the sector guide provided by SPDR or use any other online broker services and/or robo-advisor apps out there that offer ESG or flexible portfolios to create your own investment strategy.

Here’s a quick demo on how cool the Interactive Broker Impact app looks like:

Meanwhile, if you like to open an account with Interactive Broker, you can either use my referral link or do it directly over here. And if you’re interested to invest through StashAway, you can also do it with my referral link or directly over here. Either way works the same, but you and I are offered some perks if done through the referral link.

Hope, you too, will decide to choose ESG Responsible Investing or Impact Investing or Flexible Investing portfolios to support the Environmental, Social, and Governance (ESG) investment initiative. I also hope that in the near future, animal welfare will also be taken into consideration and added in for such ETFs as well.

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