Are ESG Shares a Good Investment?
Interest in Environmental, Social, and Governance (ESG) shares is growing. In 2021, $2 of every $10 Australians invested into equity funds went to ESG funds, quadrupling the inflows from the year before.
You might be thinking about investing in ESG shares, too. But the question is: are they a good investment? Let’s look at what ESG investing is, why there’s so much interest in ESG, and what you should consider when making ESG investment decisions.
What is ESG investing?
ESG investing brings Environmental, Social, and Governance scores into the decision-making process when selecting and managing investments. The idea is to invest in companies that have demonstrated a track record of following environmental best practices, social responsibility, and good governance.
There’s a lot that goes into ESG scoring, but, in general, a company that lives up to high ESG standards is given a higher score.
Investors – both individual investors and fund managers – look at these scores when deciding what shares to buy.
Why is ESG investing popular?
So what’s the appeal of ESG shares? Do they outperform the market? Or is it that Australians are more interested in putting their money behind companies that are socially responsible and environmentally friendly for ethical reasons?
It’s a little of both. Some people prefer ESG shares because they know their investments are aligned with their value system. ESG investing gives them a way to earn money and support the betterment of society at the same time.
Others believe that companies with high ESG scores will be more sustainable in the long term. As the world moves toward tighter environmental regulations and higher standards for corporate social responsibility and fair governing practices, it makes sense that the companies that are already making changes to align with these expectations will be more profitable in the future.
It’s also possible that living up to ESG standards will lead to increased efficiency and higher profits. For example, when a business uses less energy, it could reduce its operating costs, thus boosting profits. If it changes its internal practices to increase transparency, employee engagement and productivity should increase. Ideally, that, too, would drive higher profits.
Should you adopt an ESG investing strategy?
Whether investing in ESG shares is right for you or not depends on your investment goals. You can use ESG shares to diversify your portfolio, invest in companies that align with your values, or with the aim of beating the market.
But ESG is only one factor to consider when choosing investments to help you build wealth for yourself and your family. It’s also important to look at historical performance, industry volatility, and other metrics to decide how to optimise your investment portfolio.
Cooper, B. (2022). ‘A lot of headroom to grow’: Is 2022 the year ASX investors turn to ESG shares? [online] The Motley Fool Australia. Available at: https://www.fool.com.au/2022/03/01/a-lot-of-headroom-to-grow-is-2022-the-year-asx-investors-turn-to-esg-shares/ [Accessed 30 May 2023].