ESG Investing: How to Align Your Money with Your Values

Climate change, social justice, economic disparity, and powerful corporations—just some of the many hot cultural conversations about how to build a better future.

We all want to make the world better and hold personal beliefs and values about what that looks like. But how do we get there? How can we “put our money where our mouth is”? 

Enter: ESG Investing. 

Environment, Social, and Governance-focused investing is a trendy topic in the personal finance world right now. People are becoming increasingly interested in how they can align their investment dollars with their moral beliefs and values. 

This topic was explored in-depth on episode 53 of The Canadian Money Roadmap Podcast. Check it out or read on here to learn about what it is and what some pros and cons of ESG investing might be. 

What is ESG Investing? 

ESG Investing is also often referred to as sustainable investing or Socially Responsible Investing (SRI). But “ESG” is a good catch-all term that stands for Environmental, Social, and Governance—three large domains for change and improvement in our society. 

Let’s look at each of the three:

“Environmental” encompasses anything related to the conservation of the natural world. This might include areas like:

• Climate change

• Carbon emissions

• Pollution

• Energy efficiency

• Waste or water management

“Social” includes anything to do with the consideration of people and the relationships between them. Areas under this category include:

• Privacy 

• Diversity and inclusion

• Labour standards and human rights

• Employee engagement 

• Community relations

“Governance” refers to the standards for running a company. This one is less obvious than the others, but may include topics such as:

• Board composition

• Bribery and corruption 

• Lobbying and political contributions

• Whistleblowers

These are just a few of the topics, ideas, and priorities that fall within the ESG investing framework. And, with it, you can see that there are a lot of areas that make up ESG! 

Most companies don’t focus on everything here and most investors don’t care about everything here. So, ESG investing is not a one-size-fits-all approach. Investors need to be educated and thoughtful about what they’re investing in and if it aligns with their own values and morals.

Pros and Cons of ESG Investing

ESG investing might be summed up as knowing where your money is going and trying to do good with it! But, it’s a complex topic. The pros and cons of ESG investing can also be stated as: why would you want to invest in ESG options and what should you be careful about? 

First, why invest in ESG? There are two main reasons: 

• Alignment with personal morals and values. The dominant reason for most investors is that they want to know where their money is going and put it towards companies that are helping make the world a better place. So, if you care strongly about climate change or leadership and board diversity, you can invest in companies that align in that way. 

• Potential for greater returns. There is a growing number of people who believe that ESG investments have the potential for greater returns. This is because non-ESG companies (i.e., those with unethical labour practices or high carbon emissions) are starting to be seen as a big business risk. As more people align with ESG practices, more money flows in that direction and, theoretically, increases your investment returns. 

Turning to the other side, what are some challenges or risks associated with ESG investments? Again, there are two big ones:

• Lack of standardized measurements and definitions. Simply, what is ESG? Who decides which companies are responsible in these areas or not? There are a handful of ESG indices, such as Morningstar, that provide ESG scores. Some firms or asset managers also provide metrics around ESG practices, too. But without any standardization in the field, it’s hard to objectively define and measure “good” companies in relation to ESG. 

• Potential for lower returns. Yes, you read that right! Just as one of the pros of ESG investing is the potential for greater returns, there’s also a risk of lower ones. Because many ESG companies are newer and often have complex or innovative technology, they are not as stable as other traditional investments. They’re more volatile and, therefore, the returns may be lower or more unpredictable. 

Both the pros and cons of ESG investing here lead to one conclusion: look at ESG through a critical lens. It’s important to do your due diligence to understand where you’re investing and ensure it’s something that truly aligns with your values. The lack of standardization means, unfortunately, that some companies can “talk the talk” without putting it into practice. 

If you’re interested in ESG investing and want to take a critical approach, connect with your financial advisor or other finance professional to learn more about whether it’s a good fit for you and your goals. 

How to Invest in ESG Securities

Investing in ESG securities is similar to other modes of investing—you can purchase individual stocks from a company with an ESG focus or other securities like mutual funds and ETFs. Those pooled structures have a mandate to invest only in companies with an ESG-focus, though they can vary widely based on their specific mandate. 

There are two main categories within ESG:

• Exclusionary: These are pooled funds that exclude certain industries or companies. For example, many people don’t want to invest in industries like tobacco, oil and gas, weapons, or adult entertainment. 

• Thematic: This is the opposite idea. Instead of excluding companies, they build their fund around a certain type of company—i.e., renewable energy or food and water security. 

Understanding the mandate of pooled funds you’re investing in will help ensure it aligns with your morals and values. 

ESG Investing is still in its relative infancy, at least here in North America. To date, there are nearly 3 trillion dollars invested globally in mutual funds and ETFs (exchange-traded funds) with an emphasis on ESG. 

Of that, 80% is invested in Europe. This shows us that there is huge demand and huge money behind ESG investments, but there is also room for growth in the North American market. 

If you’re intrigued by ESG investing, keep these few things in mind as you move forward:

• There is no standardized way to measure and evaluate ESG—yet. So, be critical and aware when evaluating your options. 

• ESG companies are typically newer and have innovative technology—this means there may be a greater potential for high returns… or not. Be aware and prepared. 

• Check in with your financial planner to ensure this is a good fit for your goals, values and portfolio. 

If you want to learn more about ESG investing, check out the full episode on the topic—listen to episode 53 of The Canadian Money Roadmap podcast here.

—

Evan Neufeld is a CERTIFIED FINANCIAL PLANNER® professional in Saskatoon, Saskatchewan and offers both investing and fee-only financial planning services.

*Disclaimer: Any numbers or rates of returns are used for illustration purposes only and should not be taken as fact. Note that the information in this article is current to the time of writing but is not guaranteed as up-to-date past then.

This article and accompanying podcast do not constitute personal financial advice. Evan Neufeld is a CERTIFIED FINANCIAL PLANNER professional in Saskatoon, Saskatchewan, and provides this Canadian personal finance content for educational purposes to the public. You are welcome to contact Evan to receive personalized fee-only financial planning or investment portfolio management.