A Guide to Responsible Investing: How to Build Wealth While Considering ESG Factors

Posted: May 31, 2024

When investing, it’s important to assemble a diverse portfolio to help build your wealth. One option to consider is ESG (environmental, social and governance) investing, also called responsible or sustainable investing.

As awareness grows about the long-term effects of pursuing short-term gains, the idea of sustainability in all of its forms—from local production to responsible management of resources—has become increasingly popular. In addition, considering whether companies incorporate ESG criteria and policies that benefit the environment, community, and their employees into their practices, can help you to invest in ways that align with your values.

Evaluate ESG

Examining a company’s ESG factors can provide insight for individual investors, since not all organizations share the same goals. To ensure that a potential company aligns with your values, consider the following:

• Environmental: Assess an organization’s impact on the environment, including carbon footprint, water use, waste and clean technology initiatives.
• Social: Evaluate the company’s positive impact on society and how it advocates for positive change. Look for initiatives involving community involvement; diversity, equity and inclusion (DEI); employee health and safety; and human rights.
• Governance: Consider how an organization is managed in terms of driving positive change. This includes the quality of management and the board, employee compensation, non-retaliation policies, and transparency.

Identifying Responsible Investments

To identify investments with strong ESG factors, you can use the following approaches:

• Research ESG Ratings: Many financial news platforms and research firms provide ESG ratings for stocks based on comprehensive analyses of companies’ ESG practices. You might also choose to research ESG funds through brokerages—just search “ESG.”
• Explore ESG Funds: Some analysts and organizations publish lists of top-rated ESG stocks. You can also search for particular businesses or sectors that come from a portfolio with positive ESG ratings. Researching an individual company can also turn up information on corporate history and practices.

Keeping ESG factors in mind, there are two primary strategies when looking for responsible investment options:

• Activist investing: Invest in an organization with the intent of influencing how the business operates. For example, someone who cares about decreasing carbon emissions may choose to invest in an auto company to push for more eco-conscious practices.
• Impact investing: Invest in organizations that have a direct positive impact on the environment or community. For example, someone who cares about social change might invest in an organization that provides after-school programs to underserved communities.

Leveraging Expert Advice

If ESG factors are important to you, doing some homework before you choose where to invest your money is key. Remember that financial advisors are a great resource for identifying responsible investment targets. They can provide guidance and in-depth information you may not have access to, including how to diversify your portfolio to make the biggest impact.

Still have questions? Contact WaterStone Investment Services for more information.