ESG investing, also known as environmental, social, and governance investing, is on the rise as more and more investors look for ways to align their money with their values. But what are they exactly, and how can you incorporate ESG into your alternative investment strategy?
What is ESG investing?
ESG investing refers to the practice of prioritizing environmental, social, and governance (ESG) factors when making investment decisions. These factors can include a company’s policies and practices regarding the environment, human rights, corporate governance, labor standards, and more.
There are a variety of ESG investments that investors can consider for their portfolios, including socially responsible mutual funds and index funds, impact investing funds that prioritize specific causes or regions, and private equity firms focused on sustainable businesses, among others.
Despite the growing popularity of ESG investing strategies, many investors may still be unsure about how best to incorporate these opportunities into their alternative investment portfolio.
How to incorporate ESG into your investing strategy
- Define your goals and objectives
When it comes to investing in sustainable companies, there is no one-size-fits-all approach. What matters most is that you are clear about your goals and objectives from the outset.
For example, if you want to support specific causes or make a meaningful impact on the environment, you will want to look for companies with a proven track record in those areas.
On the other hand, if your main priority is financial return, then you may want to cast a wider net and consider companies across a range of industries.
Either way, defining your goals at the outset will help you make more informed investment decisions that align with your individual values and priorities.
- Do your due diligence
There’s a lot of hype in today’s business world about companies and investments that claim to be sustainable or ethical. However, as anyone who has done their research knows, not all of these organizations are actually living up to their claims.
It is essential to dig deep and examine the nuances of each company or fund in order to find those that really align with your values and deliver financial returns along with meaningful impact.
To start, look at the track record of each company or fund for delivering financial performance. After all, you don’t want to put your money into an investment if it’s not likely to grow over time.
Next, you should look at how well that organization delivers on its sustainability or ethical claims.
For example, if a company touts its commitment to environmental sustainability but is involved in controversial practices such as fracking or mountaintop removal mining, then you can bet that its actual practices don’t live up to its words.
Ultimately, doing your research is key when it comes to finding companies and funds that will truly make a positive difference in the world while also delivering strong financial returns over time.
- Consider your time horizon
Shorter time horizons can produce suboptimal investment outcomes for a variety of reasons.
First, if you’re only thinking about the next year or two, you may be more likely to invest in companies that are experiencing short-term growth at the expense of long-term sustainability.
Second, even if you do choose to invest in sustainable companies, it can take time for those investments to generate returns. Sustainable companies may be investing heavily in R&D or other long-term initiatives that take time to pay off.
Finally, shorter time horizons can lead to a focus on quarterly results, which can create pressure to sacrifice long-term goals in favor of short-term gains.
As an investor, it’s important to consider your time horizon and make sure it aligns with your investment goals. If you’re investing for the long term, don’t be afraid to sacrifice short-term gains in order to support sustainable companies.
- Diversify your portfolio
If you’re like most people, the vast majority of your assets are probably in stocks, mutual funds, and other traditional investments. And if you’re reading this, you’re likely either already investing in alternatives or are planning to.
But as the world becomes increasingly focused on sustainability, it’s important to diversify your portfolio to include companies and sectors that are involved in sustainability initiatives.
This not only reduces your overall risk but also gives you the opportunity to profit from the growing trend toward sustainability.
There are a number of ways to do this, but one approach is to invest in a green mutual fund. These funds invest in companies that are committed to environmentally friendly practices, such as renewable energy, energy efficiency, and waste reduction.
Another option is to invest in an index fund that tracks a green index, such as the Dow Jones Sustainability Index or the MSCI World Clean Energy Index. By investing in these types of funds, you can ensure that your portfolio is well-diversified and that you’re positioned to profit from the world’s move toward sustainability.
Examples of ESG in traditional and alternative investments
There are a variety of ESG investments that investors can consider for their portfolios.
Traditional investments:
- Green bonds: Green bonds are debt instruments that are used to finance environmental projects, such as renewable energy or clean transportation.
- Renewable energy stocks: Renewable energy stocks are a great way to invest in the continued growth of the renewable energy industry.
Alternative investments:
- Sustainable real estate with environmentally friendly design and building structures.
- Private equity firms focused on sustainable businesses.
- Venture Capital funds, like Overlooked Ventures, which invests in companies with historically overlooked founders.
- Vertical farming, which produce less waste and take up less space than traditional farms.
Conclusion
It’s important to keep in mind that ESG investing is not just about choosing companies that score well on sustainability metrics. It’s about researching and thinking critically about how environmental, social, and governance factors can affect the performance of your alternative investments, as well as choosing investments that align with your personal values.