How to invest in ESG: Connecting company commitment to your values
Watch the episode:
Read what we discussed:
Investing with Purpose: How to Align Your Investments with Your Values Through ESG
Environmental, social, and governance (ESG) investing has exploded in popularity in recent years. Investors, especially younger generations, are increasingly looking to invest in companies and funds that reflect their personal values and work towards positive change.
But with the rapid growth of ESG investing has also come substantial confusion about what it really means and how to evaluate investment options.
Ben Vivari and Kyle Purcell, co-founders of Till Investors and authors of the new book "Sustainable Investing Starter Kit for Everyday Investors," break down the basics of ESG investing.
They explain how it differs from related concepts like corporate social responsibility (CSR), provide advice on how to spot and avoid "greenwashing," and share tips for selecting investments aligned with your values.
What's the Difference Between CSR and ESG Investing?
While corporate social responsibility (CSR) and ESG investing share similarities and values, Ben points out a key difference: "CSR is an internally driven exercise with ESG, that external check [from investors] creates a lot more external, and I would say a lot more effective accountability."
With CSR, a company sets internal goals, policies, and activities related to social and environmental impacts.
In contrast, ESG investing flips the script - investors get to define "good" based on their own priorities and then find and reward companies aligning with those values.
So while CSR is about what companies say about themselves, ESG investing enables investors to hold companies accountable to external standards of social and environmental performance.
Powerful legislation in Europe is accelerating this shift by mandating ESG disclosures and reporting standards.
Though standards in the U.S. currently lag behind Europe's, the demand signal sent by ESG capital flows is already driving better corporate practices.
What Makes a "Good" ESG Company?
With so many factors to weigh, how can individuals evaluate whether a company is "good" from an ESG perspective?
As Kyle explains, "you have to really know what you believe and what's really a priority for you." Investors need to get specific about their personal values to effectively screen potential investments.
He uses electric vehicle maker Tesla as an example. While the company has advanced the transition from gas vehicles to EVs, it struggles on other social and governance factors.
Rather than relying on an oversimplified ESG "score," Kyle advises comparing companies within industries to see who meets important criteria.
Since no company will be perfect, focus on those aligning with your main priorities.
You have to really know what you believe and what's really a priority for you
Matching Your "Fighting Style"
To select ESG funds that fit their values, Ben and Kyle urge investors to think about their "fighting style." If you wanted to convince a business behaving badly to improve, would you:
- Avoid them entirely and never go back?
- Reward better alternatives, even if imperfect?
- Engage through shareholder advocacy?
These approaches correspond to ESG investing strategies.
You can avoid sectors, reward leaders within industries, or engage companies through proxy voting and shareholder resolutions.
Clarifying your preferences upfront helps steer you towards compatible funds.
And rather than relying on slick marketing claims, Ben and Kyle advise peering under the hood to understand exactly how prospective funds implement their strategies.
Examining components like prospectuses and holdings provides a reality check and guards against greenwashing.
Actions for Companies and Employees
Ben and Kyle close by offering suggestions for companies interested in encouraging sustainable investing, whether through CSR or ESG. On the CSR side, corporations can set an example by transparently disclosing and improving their own impacts.
And to boost ESG investing, they recommend offering sustainable fund options in employee retirement plans.
Employees can also drive change by asking their company to include ESG choices in their 401(k). As Kyle notes, "demonstrating to your employee base that you are hearing that and you're reacting to that...is a really valuable way to pick people around."
With talent attraction and retention on the line, employee voices on ESG investing make a difference.
Continue Your Sustainable Investing Education
For readers interested in learning more about aligning their money with their values through ESG investing, Ben and Kyle's new book "Sustainable Investing Starter Kit for Everyday Investors" is now available.
Their goal is to empower more individual savers and investors to own investments they feel good about.
The ESG investing landscape continues evolving at a dizzying pace.
But by clarifying your personal priorities, scrutinizing funds, and understanding options, you can begin investing with purpose today.
Every investment decision makes an impact - why not consciously choose to make it a positive one?