Investing strategies: Why consider an ESG fund?
Whether you're a seasoned investor, or a complete beginner, you'll likely want to consider where your money goes and what it invests in.
ESG funds are portfolios of shares, much like ETFs, that emphasise the ethical impact of an investment, while maximising returns for the investor.
ESG funds are growing in popularity in the share trading world. So much so, many companies ensure ESG best practice as part of their operations already.
By choosing to invest in what you believe in (or divest away from things you disagree with), you’re essentially viewing potential investment funds through an extra, non-financial lens. While you’re thinking about your return on investment, you’re also considering the impact of your money.
When you consider that investors, like yourself, can be stakeholders in any company you fund, the purpose of ESG investing becomes clearer: ‘you vote with your dollar’. And, boy, do businesses want your dollar.
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What does ESG mean in investing?
ESG stands for Environmental, Social, and Governance, and is as much an investment strategy as it is an ethos.
Investing in ESG funds is a good step towards being a more ethical investor.
Let’s take a look at the different sub-categories of ESG fund themes. These are the sorts of causes which ESG funds build portfolios around. Some ESG fund portfolios will have cross-over areas between environmental, social, and governance strategies, so keep that in mind when you’re comparing funds.
Environmental
Environmentally focused ESG funds will consider the impact of investment on a range of environmental factors, and is suited to those who want to avoid funding unsustainable energy sources and industries (like coal mining).
Environmental considerations can include:
- Air and water pollution
- Biodiversity
- Carbon emissions
- Clean technology
- Climate change
- Deforestation
- Energy efficiency
- Renewable energy sources
- Resource depletion
- Sustainable agriculture
- Waste management and pollution
- Water scarcity.
Social
ESG funds which emphasise social responsibility will avoid investments that create or contribute to social issues. Investing in an ESG fund with a social strategy is ideal for those who are looking to avoid funding gambling, tobacco, and child labour.
Social considerations can include:
- Child labour
- Community relations
- Diversity and inclusion
- Ethical product sourcing
- Gambling
- Health and safety
- Human rights
- Indigenous reconciliation
- Philanthropy
- Tobacco
- Working conditions.
Governance
ESG funds can also consider the way investments and the companies which will benefit from your money are governed. Funds that emphasise governance will use investment and divestment strategies to influence the way companies are run.
Governance considerations can include:
- Board diversity
- Bribery
- Business ethics
- Compliance
- Corporate culture and conduct
- Corruption
- Executive pay
- Political and lobbying donations
- Tax strategy
- Whistle-blower schemes.
What do you need to know before you invest in an ESG fund?
Before you go investing in an ESG fund, make sure you understand:
- What your own ESG values and ethics are
- What a fund’s ESG strategy involves
- How a fund screens good or bad investments
- How funds analyse their impact
- How ESG funds engage with companies.
Funds that engage with an ESG strategy will likely explain their strategy and approach to investing online, or in their product disclosure statement (PDS).
By understanding all of these things, you’ll be able to get a clearer picture of how an ESG fund operates, but perhaps more importantly, you’ll know whether a fund aligns with your values.
Is ESG investing greenwashing?
It’s possible that an ESG fund is greenwashing their investment product, but there are still ways to work out if a fund is walking the walk and not just talking the talk when it comes to sustainable practices.
By reading a fund’s ESG strategy, you’ll get a clearer picture of where your money is going and the aims of the fund’s approach. From there, you can be the judge of a fund’s ESG strategy.
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