When I started investing for retirement, I learned the fundamental principle of diversification—investing money across a wide variety of companies, industries, and regions to create a balanced portfolio that’s resilient to risk. So I chose funds for my IRA and 401k plans that aligned with my risk tolerance and let the fund managers do their work.
When my account statements arrived, I mostly looked at the bottom line, checking to see if the numbers were going in a positive direction. Sometimes I’d skim the long list of company names and tickers. These were the organizations I was supporting with my money, whether or not I knew anything about them. To be honest, I figured I didn’t have a choice. I needed to trust the fund managers unless I wanted to research every single company myself.
Getting schooled by the next generation
When I started talking with my daughter about investing her inheritance, she challenged me with some of her Gen Z sensibility: What if she didn’t want to invest in companies that sell products that might harm people or the environment? I started to lecture her about how inadvisable it would be to keep money under a mattress, but then remembered the tendency of young people to do the opposite of what their parents tell them. I suggested instead that we talk to my financial advisor.
My financial advisor suggested learning about ESG index funds. My daughter could invest in companies specifically chosen for their focus on environmental, social, and governance practices. There are services that score companies for ESG, and this information is considered alongside traditional financial analysis such as risk and profitability. In addition to helping investors sleep at night, ESG proponents argue that companies focused on sustainability, ethical responsibility, and corporate governance will do well in terms of long-term financial health and societal well-being.
What is ESG investing?
Environmental factors considered in ESG may include a company’s carbon footprint, energy use, waste management, pollution controls, and strategies for addressing climate change. Social factors may look at how a company manages employee well-being, customer satisfaction, product safety, and community engagement. Governance examines the company’s leadership, ethics, transparency, and accountability.
As I learned about ESG, I came to find out that it’s not just a “squishy” form of investing like paying more for a garden burger that doesn’t taste at all like meat. In fact, financial experts see a lot of benefits to ESG for investors interested in the long-term health of their portfolios. Often companies with strong ESG practices are more resilient, innovative, and aligned with evolving societal expectations. For example:
- Companies that manage for climate change, resource scarcity, or environmental regulations are less likely to face costly fines, litigation, or service disruptions.
- Not attending to poor labor practices or employee dissatisfaction can lead to reputational damage, boycotts, and employee turnover.
- Companies with good ethical governance often enjoy better public perception and customer loyalty, stronger boards, and more engaged employees.
ESG is a structured way to invest your values. It’s an added layer of analysis for the conscientious investor. However, ESG isn’t perfect—in fact, I was interested to see that nuclear power companies are not on the “good” list since I personally think they’re a sustainable energy solution.
Since ESG rating is still a relatively new practice in the financial world, there’s also a lack of standardization. Different agencies use different criteria and weightings. A company might get a high score from one provider and a low score from another. By its nature, some of the evaluation is based on value judgments about what’s good for society.
The effect of ESG on companies can be a positive force if they’re sincere about their efforts. Many companies are identifying areas where they can improve in order to increase their ratings. Hopefully, focused scrutiny will result in real change that goes beyond greenwashing or marketing hype.
After my daughter chose an ESG investment strategy, I was able to compare her portfolio’s performance with mine. It turns out, our returns were comparable. After learning more about ESG options, I felt comfortable investing a portion of my portfolio to ESG, too.
If you’ve been wondering how you can align your investment portfolio with your values, talk to your Arrivity financial planner. They’ll help you create a portfolio that provides more emphasis on factors and values that align with environmental, social and governmental considerations.
Things to think about when investing your values:
- Your Arrivity financial planner can help you evaluate ESG funds as part of a balanced portfolio so you can see how funds that may exclude certain types of companies compare to market indexes like the S&P 500.
- Your financial planner’s goal is to help you minimize costs and track the market with a broad mix of asset classes, so ESG funds are usually only used for a portion of a portfolio.
- If requested, Arrivity can conduct an analysis and compare a variety of ESG funds to compare their characteristics, expenses and performance over time.
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Liz is a Late Boomer in the sandwich generation who started an independent writing and brand consulting practice after years as a senior marketing executive. She lives in Seattle, Washington. Her mother lives nearby and her daughter is a recent college graduate.
The foregoing content reflects the opinions or perspective of Liz Behlke and/or Arrivity financial planners and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful. Arrivity does not give tax or legal advice. Tax and/or legal strategies should be discussed with a professional before implementing.