Environmental, social and corporate governance (ESG) investing focuses on companies that support environmental protection, social justice, and ethical management practices. Like all investors, ESG investors value returns. However, they do not prioritize profits above supporting companies that fit into their ethical frameworks.
Different ESG investors follow different trends in ethical investing. For example, some ESG investors are environmentally focused and prefer to put their money into alternative energy and green companies. Others champion social justice and seek out companies that promote diversity, economic equality and other human rights issues. Then there are ESG investors who focus on companies' management practices, looking for businesses that employ practices such as restricting management pay to reasonable levels and providing work/life balance to employees.
With the coming transfer or wealth to the Millennial generation, many of these new potential investors will be looking to put their money to work. This is a generation of people who are very socially conscious and advocates of ESG causes. Most if not all of these emerging investors will want to invest in things that they believe in and support, and learning about ESG investing can help you better understand what these investors are looking for. Here are three trends to keep track of and consider.
The U.S. Department of Labor released a new regulation in late October 2020 that may limit or eliminate socially responsible investing in retirement plans. While the rule was revised to remove explicit references to environmental, social, and governance (ESG) factors, it mandates that fiduciaries of retirement plans choose investment strategies based entirely on how those strategies affect financial performance. This ruling may have a significant impact on funds and investments classified under ESG and socially responsible investing.
Well over 90% of climate scientists believe that climate change is real and that human activity is at least partially responsible for it. Several roadblocks, both political and practical, have kept many developed countries from moving full steam ahead in tackling climate change. However, progress is being made, and climate change represents an opportunity for ESG investors to profit while also investing in a cause in which they believe.
Solutions such as cap and trade legislation are constantly passed around like a political football in the United States. If cap and trade legislation passes, it could have a devastating effect on the nonrenewable energy sectors, such as oil and coal. However, the demise of coal and oil would create a void to be filled by renewable energy sources, such as wind, solar and nuclear energy. ESG investors who are optimistic about climate change legislation should research potential alternative energy investments.
According to some politicians and activists, women in the U.S. still earn, on average, only 78% of what men earn for doing the same jobs, though others have called into question the methodology used to come up with this statistic.
Regardless of its accuracy, the 78% claim, and the measures that many corporations have taken to paint themselves in a positive light where this issue is concerned, represent a buying opportunity for ESG investors. Those who believe the gender wage gap is a pressing problem have growing opportunities to invest in companies that have demonstrated a priority of being on the forefront of solving is issue.
For those who were affected by the Great Recession of 2007-2009, insult was added to injury when news stories emerged about the exorbitant salaries paid to chief executive officers (CEOs) who had largely contributed to the downturn. In some cases, executives were paid millions to go away quietly after they had run their companies into the ground.
Executive compensation is a major concern for many ESG investors. For investors who fall into this camp, opportunities abound as many large corporations are making headlines for dialing back their executive compensation to more reasonable levels. The CEOs of several large companies, have voluntarily reduced their annual compensation, though it should be noted that these executives were already very wealthy before making this decision.
For ESG investors who feel that runaway executive compensation undermines the economy, it might be time to seek out and invest in companies that are proactive on this issue.