In 2022, there were $51.1 billion of flows into environmental, social, and governance (ESG) funds available to U.S. investors, marking a nearly tenfold increase over 2020 levels.
Does this start suggest that more investors care about their investments with their values, but is ESG investing, also known as impact investing, right for you?
Impact investing is an investment strategy that combines financial returns with the pursuit of positive side change in the world. Through the use of investment screeners, it’s possible to invest more in companies and projects that solve specific problems though. For example, investors can choose to invest in many companies that only use renewable energy. You can find good impact investments in several asset classes including equities and fixed income.
In other words, U.S. investors are may be sacrificing a small number of returns in exchange for making good investments that fit their values.
Many ESG investors are willing to make that tradeoff, though; according to the latest survey of Investopedia and Tree hugger readers, nearly half of ESG investors said that they’d be willing to take a 10% loss over a five-year period to invest in a company that “aligns exceptionally against ESG standards.” But 74% of respondents said that valuation/price was “very or extremely important to them.”
The data doesn’t mean that investors need to make a tradeoff between their good values and their returns, but it does indicate that the average ESG-friendly investment trades at a premium.
How to Make ESG Investments That Closely Align With Your Values:
While existing ESG tools can help those investors learn more and more about impact investing and the different opportunities available to them, it can be a little difficult to know the best investments to choose. Investing with a reputed firm that is transparent about its screening processes and does its due diligence can have a significant impact.
Whether or not ESG investing is very right for you depends on whether you want to combine your values with your investments. From there, you have to find a new way to ensure that your ESG investments meet both your financial and environmental/social objectives. By doing that, you can build a sustainable portfolio in every sense of the word.