Have you ever used the terms “sustainability” and “ESG investing” as if they’re one and the same? It’s okay — it’s common practice. However, the two concepts are different, but how? Let’s take a look at the broad topic of sustainability and the more specific ESG investing.
In 2021, nearly $120 billion went into ESG investments, more than double the record high of $51 billion in 2020. ESG investing is likely to become a trend that will continue into the future.
We’ll look at the similarities and differences and see where they overlap in this piece. We’ll also walk through how to invest with ESG and sustainability in mind and will include a list of different types of investments you may want to consider adding to your portfolio. Let’s dive in.
The Differences Between Sustainability and ESG
Do you know the differences between sustainability and ESG? Put simply, the main difference has to do with the ability to pinpoint the various characteristics between both. Sustainability can mean a wide variety of things to stakeholders and companies. ESG, on the other hand, gives stakeholders and companies a starting point to identify a specific criteria based on its acronym: environmental, social and governance. Let’s go over the definition of sustainability and ESG, below.
Quick, what comes to mind when you think of sustainability? Do you think of personal initiatives like reducing your carbon footprint, trying to reduce your energy consumption or reducing your water usage to try to reverse climate change?
Sustainability broadly means meeting the needs of the present without compromising the ability of future generations to meet their needs. Sustainability means that an entity will do its best (often through its business practices) to lessen its impact on the world around it.
Because it’s such a broad concept, it’s hard to quantify, measure and report. Companies need a more concrete set of criteria, independent of sustainability goals. This is where specific ESG criteria come into the mix.
ESG metrics, opposed to the wide-reaching concept of sustainability, are more data-driven. ESG focuses on three specific ESG policies — environmental, social and governance — rather than individual concepts like “reducing greenhouse gas emissions” or “using renewable energy.” Let’s take a closer look at each one of these ESG factors.
“Environmental” references exactly what we think of when determining corporate sustainability factors. The environmental impact of a company can concern its goal to get to net-zero (consuming only as much energy as produced), reducing carbon emissions, improving resource efficiency, its impact on natural resources, reducing waste in the supply chain and hitting the right environmental regulations.
Sounds just like the wide-reaching definition of sustainability, right? Yes, however, social and governance are also included in ESG, something not considered with simple sustainability metrics.
“Social” has to do with a company’s impact on its constituents, including its relationship with employees, customers, financial stakeholders and the community. Social factors may include factors that impact workplace safety, human rights, employee engagement, inclusion and diversity, customer satisfaction and data and privacy.
Governance, or corporate governance, focuses on corporate social responsibility (CSR), business leadership and other structures that take various types of governance issues into consideration. You may want to consider:
- The amount executives get paid
- Diversity on the board of trustees
- Whether shareholders can participate in decision-making
- Preventing bribery and corruption
- Risk management
Many companies, from financial services institutions to other types of businesses in capital markets, may put a heavy emphasis on governance issues.
How to Invest with ESG (and Sustainability) in Mind
How can you marry your own money habits, ESG and sustainability in your own investing? Let’s take a look at the steps you can take to make sure you get the right types of ESG investments into your portfolio. Do your research, know your priorities and consider how you want to invest. Finally, you’ll invest your money, and don’t forget to consider investing in UNest.
Do Your Research
Companies should measure their ESG performance by providing measurable ESG data in sustainability reports. To get the most up-to-date ESG reporting standards, look for reports put forth by the Global Reporting Initiative (GRI) and/or the United Nations Principles for Responsible Investment (PRI). You can also look to third-party sources such as employee reviews and other items to help you determine whether the company meets benchmarking and specific bottom line requirements that you want a company to meet for investment purposes.
Know Your Boundaries
Even if a company swears by the books when it comes to “ethical investing,” it might not align with your exact values. For example, the company might value sustainable development, but not quite the way you’d like them to. You’d like to see a company meet your values a little bit differently. Values all differ from person to person, so take a little time to identify what fits best for you. If you’re directly opposed to investing in companies that don’t sell alcohol or tobacco, you may need to consider only a specific set of companies that fit the type of sustainable business you’re looking for.
Consider How You Want to Invest
Once you’ve done your research into a wide variety of ESG investing factors, will you invest in ESG stocks, bonds, index funds, ETFs, mutual funds or another type of security? Check into the financial performance of various types of investments. How do you want to invest and what do you want to go into your portfolio?
- Stocks: When you purchase a share of stock, you buy a small sliver of a company. Companies sell shares of stock to investors to raise cash for the company. Buying individual stocks is riskier than purchasing bundles of stocks because if you only buy shares of stock from one company, you’re putting all your eggs in one basket, which means that you could lose your entire investment if the company hits a downturn.
- Bonds: Bonds are loans you make to a company, government or other entity. The bond issuer will repay your money and pay you back with interest when the bond matures. Bonds are less risky than stocks but don’t offer as large of returns. However, if you have a low risk tolerance or prefer a fixed return, you may receive payments once or twice per year.
- Mutual funds: Think of mutual funds as a basket of stocks pooled from many investors, then employ a professional manager to invest that money in stocks, bonds or other assets. Mutual funds develop a strategy that invests in various types of funds, including stocks and bonds, sometimes a mixture of both. A fund manager manages these funds, so you’ll pay expense ratios to maintain the mutual fund.
- Index funds: Index funds are a type of mutual fund that tracks an index passively, which is a fancy way of saying that instead of a money manager picking investments, an index fund automatically tracks an index. For example, an index fund that tracks the Russell 2000 index will mirror the stocks in that index. Index funds tend to cost less than mutual funds because they are passive investments.
- Exchange-traded funds (ETFs): ETFs are a kind of index fund because they track the benchmark index and mirror the performance of that index. Like index funds, they are not actively managed. Like a stock, ETFs trade on an exchange, which means that you can continually buy and sell ETFs throughout the day. An ETF’s price will fluctuate throughout the day. However, you can only buy and sell index funds and mutual funds once per day — at the end of the trading day.
Invest Your Money
Once you’ve decided you’ve made the right investment decision for your particular goals and specific long-term needs (always consider your investment horizon and risk tolerance as well!) and the direction you’d like to go with your investments, it’s time to invest. Earmark the amount of money you’d like to invest, make sure you have a brokerage account set up or get a financial advisor to help you.
UNest Offers ESG Portfolios
ESG investing is a relatively new concept that has gained significant momentum over the past five years, and UNest has also jumped in to offer parents many ESG investment opportunities for kids.
In fact, UNest makes it easier than ever to invest in your child’s future. UNest offers ESG investments to its lineup of low-cost, diversified portfolio options. Through UNest’s sustainable investments, you can help your child meet financial milestones and also make a positive impact on the world.
UNest also leads a shift toward more socially responsible habits for families in a way you may not expect. The company has saved 30 tons of toys and packaging from landfills due to its monetary gifts sent on the platform. UNest also recently opened a waitlist for its upcoming cryptocurrency feature, which enables you to invest in digital assets and individual stocks for kids.
Get started now by downloading the UNest app.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.