Sustainable Investing: Why You Should Care

What's all the fuss about?

Hi friends and fam, it’s been a while! Apologies if you’ve missed us, but we took a little break because we felt like the “investing 101” part of our mission was accomplished. Going forward, instead of being on a weekly schedule, we’ll send out updates only for stuff we think truly matters.

With that said, let’s talk about a concept that’s been top-of-mind for the professional investor community this year: Environmental, Social & Governance i.e. ESG-based investing. We’ll discuss why you should care about ESG (if you need convincing) and how you can go about making your portfolio more sustainable.

So, like, being green is cool but what’s it got to do with stocks?

We know there’s a few of you wondering why this is relevant at all. We feel you, but hear us out. Even if you’re not personally motivated by sustainable investing, the tidal wave of institutional investment $$ being directed towards ESG just cannot be ignored. Some of the biggest money managers (ahem, BlackRock) and pension funds in the world are now fully ESG-driven. This means that they can only invest in stocks that meet certain minimum Environmental, Social, or Governance criteria.

What does that translate into? Companies with low environmental impact that prioritize social work and equitable management structures are picked as potential ESG candidates, and if their financials make sense, the BlackRocks of the world will invest in them. Which means tech, clean energy and service-driven businesses are in… but tobacco, big oil and defense not so much.

That’s fine, but why should it matter to you? Well, consider this: a third of all U.S. assets under management in 2020 were driven by ESG investing. Pretty crazy, huh? In practice, what that means is: if a company you’re considering investing in doesn’t meet sustainability standards, you could be a very lonely investor indeed, with none of the big-money funds helping to drive demand. We’re already seeing that play out in the oil market, where companies like B.P and ExxonMobil are becoming increasingly difficult for large asset managers to justify purchasing.

ESG investors’ hope is that pressure from the investment community will help push these companies into slowly pivoting towards natural gas and other clean sources of energy. With Pres. Biden incoming and the Green New Deal on the table, it’s all a perfect storm.

I’m convinced, let’s get sustainable!

Put Your Money to Work

Ready to start investing sustainably? Great - it’s easier than ever these days! The lowest effort way is to just buy an ESG ETF, whether that’s in the U.S. or Hong Kong or India. Pretty much every major exchange in the world now offers some sort of local ESG ETF. Keep in mind, however, that these ETFs tend to be heavily weighted towards tech stocks (what’s greener than software?) so you might be increasing your exposure if you’re already invested in tech.

What about single stocks? There are a plethora of environmentally-friendly companies to choose from: think software, social media, solar panels, electric cars. Care more about social impact and governance? There’s plenty of options there too. If you’re short on ideas, check out a sustainability screener such as this one to help you pick.

While you might not necessarily go out actively looking for ESG investments, the next time you have your eye on a stock, consider its long-term outlook not just from a financial perspective but also through an impact lens. Even if sustainable investing isn’t something you care about, it’s the way the industry is headed.

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We hope you learned a little something new today! ESG may not be your personal cup of tea, but it’s important to be aware of it nonetheless because it’s just such a massive driver of global investment decisions.

This is true not just in the U.S. and Europe, but also in places like Japan and China where governments are putting increasing pressure on pension funds to “go green”. With Biden and the Democrats gaining power in the U.S., expect this trend to only intensify in 2021.