Socially Responsible Investing Makes Good Financial Sense
Socially Responsible Investing is often shortened to “SRI” or more recently “ESG”. The “E” in ESG stands for Environment, the “S” stands for Social, and the “G” stands for Governance. SRI refers to using your investments to encourage behavior that is generally better for society in the long-run. This is done by only investing in companies that are good to their employees, are responsive and transparent to shareholders, doesn’t harm the environment, and doesn’t encourage behavior that is harmful to its customers.
By looking at what SRI means, it’s easy to see why companies with a high ESG score should also be profitable over the long-term. If a company has happy employees, they’re probably also more productive and less likely to job-hop to a better company. If a company isn’t polluting it won’t be paying fines and expenses linked to cleaning up their messes. If it has a good board of directors, they will make decisions that are in the best interest of the company in the long-term and won’t be paying legal fees to defend lawsuits from its shareholders. Also, if it’s not selling something that is harmful to its customers then those same customers will be around a long time to continue buying their product.
Why should you invest in ESG companies/mutual funds?
- Socially responsible companies focus on the long-term and therefore should do better than their non-ESG companies in the long-run.
- There are more ESG mutual funds becoming available every day. Ten years ago it was difficult to find good socially responsible funds that had reasonable fees and a good track record against their non-SRI peers. That is no longer the case.
- There is more research available on ESG companies/funds every day. Morningstar has made a major push to incorporate a company’s (or mutual fund/ETF) ESG score as part of their overall rating.
- It’s a good way to align your values with your investing. Fortunately, with the greater availability of these funds, you don’t have to give up performance for “value investing”.
I believe that considering ESG when evaluating an investment product is fundamental to long-term investing. If you’d like to discuss incorporating ESG funds into your portfolio, please schedule an appointment with me to discuss.