Environment, social, and governance (ESG) investing is becoming more popular. These investments have benefits that make them a good option for most portfolios. What are the advantages of this kind of investment?
1. Build a Principled Portfolio
While investors all want a return on their investment, some don't like to invest in certain types of organizations. If a company doesn't meet one or more of their principles, then they don't want to give it financial support.
For example, some investors avoid companies that deplete natural resources or that harm the environment. Or, they don't want to invest in companies that don't have strong social ethics or responsible business and human practices.
In this scenario, ESG investments ally with your principles. These companies pay more attention to the effects they have on the environment, the economy, and society. Your investments here will match your own principles. The companies you invest in will do no harm and neither will you.
2. Reduce Risk in Your Portfolio
A good portfolio should include a range of investments. Typically, you spread your risk by investing in different sectors and investment vehicles. For example, a portfolio could include high-, medium-, and low-risk investments. This mix helps you smooth out peaks and troughs in investment performance. If one part of your portfolio has a downturn, then other sectors should give you some financial stability until things pick up again.
ESG investments help you mitigate against risk as part of a balanced portfolio. ESG companies typically perform consistently well because they are well-managed. They often do well even in general market downturns because they follow responsible and sustainable business practices. They are better positioned to ride out downturns in their sector.
3. Add Future Growth to Your Portfolio
If you invest in established companies, then you are investing in their current reputation and past performance. While blue-chip stocks should hold their own in the future, they might be a steady investment rather than a high-growth one.
ESG investments could give you better long-term returns as well as current stability. These companies have strong governance and reputational advantages. They retain and attract employees because they treat them fairly. They also typically reinvest profits. These factors make it more likely that a company will grow.
Plus, some of these companies work in growth markets that have yet to reach their full potential. For example, some specialize in alternative energy solutions. The products and services they offer can only become more vital as natural resources run down. These companies could become the blue chips of the future.
For more advice on how to invest in these sectors, contact an ESG investing advisor.
Share