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Is ESG Investing the Right Choice for You?

December 13, 2022

In my previous piece, we discussed why climate change isn’t just a global problem…it’s a female problem as well.

As the climate shifts, women are more adversely affected because of their lack of human rights, poverty, and the systemic violence that is often a result of catastrophic events.

Again, we go back to the question: What does this have to do with financial planning?

With more and more women taking control of their finances, many are looking to not only plan for their own future but the futures of others as well. With 62% of women indicating they’re concerned about climate change more than retirement planning (at 51%), it makes sense to find a solution that serves both.

This renewed drive to live intentional lives is happening at the same time that the face of wealth is becoming more female. As of 2020, women in the U.S. controlled $11 trillion, about a third of financial assets, and that number could reach $30 trillion by 2030. These two trends— women’s growing financial clout coupled with their recharged commitment to leading a meaningful life—are the twin engines behind women making a greater impact than ever before. (Source)

Welcome to ESG Investing

ESG investing, or environmental, social, and governance investing, aims to be the solution. Here’s the official definition of ESG investing from Investopedia:

Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.

Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Sounds like a pretty good deal, right? Help the world AND invest in your retirement? More and more people are latching onto this idea; in a June 2022 Harvard Law study, they found “…more than a quarter of global investors say ESG is central to their investment approach (26% vs. 28% in 2021).”

Another option is what is considered a more focused approach called SRI, or Socially Responsible Investing: this includes “eschewing investments in companies that produce or sell addictive substances or activities (like alcohol, gambling, and tobacco) in favor of seeking out companies that are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.” (Source)

Implementing a More Intentional Approach to Your Investing

While ESG investing might be sounding better and better to you, it’s important to note that it’s still in the relatively early stages and you should know the pros and cons. For example, one con that Investopedia points out is:

“…you will not be able to hold the full universe of stocks available in the market. After all, tobacco and defense, two industries avoided by many ESG investors, have historically produced well-above-average market returns and can buck recessionary trends. In other words, U.S. investors may be sacrificing a small amount of returns in exchange for making investments that fit their values.”

However, on the pro side…

Some have argued that, in addition to their social value, ESG criteria can help investors avoid the blowups that occur when companies operating in a risky or unethical manner are ultimately held accountable for its consequences. Examples include BP’s (BP) 2010 Gulf of Mexico oil spill and Volkswagen’s emissions scandal, which rocked the companies’ stock prices and cost them billions of dollars.

The bottom line is that no matter how you choose to invest, the most important factor for your portfolio is diversification. It is possible to have a fully diversified portfolio with only ESG investing but that may not be possible for everyone. An advisor can help you find the right balance for you between ESG and more traditional investing.

Your Investments Could Make a Difference

However you choose to invest your money, keep in mind that you could have the power to make an impact – and that’s an exciting prospect.

“About 39% of [Gen Xers] have included sustainability in their portfolios, and they often care about causes like water quality and quantity, renewable energy and lower carbon emissions….

There’s still one wildcard that could change the tide for middle-aged investors: a hefty inheritance from their relatives. Between 2018 and 2042, aging households will possibly hand out $61 trillion to their heirs, with Gen X being the primary beneficiary. This transfer of assets may flow into sustainable investments, as younger generations invest differently than their elders.” (Source)

But how do you choose what to invest in? In the next piece, we’ll discuss “greenwashing” and how working with a financial advisor can help you ensure your investments are going to reputable companies with values that align with your own.

Wonder where you’re most aligned with ESG investing? Take the quiz! You’ll receive a personal report that helps you understand where you can adjust your portfolio.

CLICK HERE for the quiz!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Socially Responsible Investing (SRI)/Environmental Social Governance (ESG) Investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

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Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through GPS Wealth Strategies Group LLC, a registered investment advisor. GPS Wealth Strategies Group LLC and Aspen Wealth Management are separate entities from LPL Financial.

The LPL Financial registered representative associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.
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