With Earth Day approaching (April 22, 2024, for those keeping track at home), we thought it would be a great opportunity to look at some recent trends in the environmental, social, and governance (ESG) investing space. A type of values-based investing, ESG investing has grown increasingly popular in recent years, and the gist of it is that you invest in companies that prioritize (and report on) sustainability and social good.
Want to learn more about ESG investing? Reach out to a financial advisor today!
Examples of ESG investing include investing in companies looking to reduce their use of plastic packaging, implement fair labor practices, or create a more diverse governing board. And with technology being so transformative in recent years, companies looking to implement or alter these kinds of policies have new opportunities at their disposal—and potentially greater risks.
Here are four of the top questions ESG investors must consider in 2024:
1. How Will Artificial Intelligence Be Used?
It seems like artificial intelligence (AI) is everywhere these days, so it should come as no surprise that it’s a hot topic in ESG investing right now. Everyone from corporate employees to Hollywood actors has questions regarding how AI will be used in their industries, how it will affect the labor market, and what kinds of guardrails will be put in place to keep it in check. There are also ESG considerations regarding the enormous amounts of electricity needed to power AI.
It seems that most insiders agree that AI should be used simply as a tool to be leveraged by human employees, but the benefits of this tool are aplenty. Companies will be able to use AI tools to quickly collect data, process reports, and map trends. However, since technology is evolving so rapidly, and its use cases are appearing infinite, one thing investors must consider is what types of self-governance policies these companies will implement to keep AI under control. This is an issue that has far-reaching effects on all three pillars of ESG investing, so it’s something investors must watch closely.
2. Who’s in Charge?
It’s not simply AI that must be monitored. With the universality of social media and the 24-hour news cycle, how today’s companies operate is under greater scrutiny than ever before. That’s why ESG investors will need to pay attention to how these companies are being run, which means that when deciding on where to invest, a greater emphasis must be placed on transparency. Adequate corporate oversight is a big part of values-based investing, and with so many new opportunities and challenges in the corporate landscape, ESG investors will want to place trust in companies who are open and honest.
3. What’s Happening with the SEC’s Climate Rules?
Another hot-button ESG topic in the U.S. is what’s happening with the Securities and Exchange Commission’s (SEC) climate rules. As of this writing, the SEC has voluntarily paused the implementation of its climate reporting rules. These final climate rules, if adopted, would require public companies to report their greenhouse gas emissions and disclose climate-related risks to their business.
While some conservative lawmakers view the SEC’s proposal as unnecessarily strict, environmental groups don’t think they go far enough. By voluntarily freezing the implementation of these climate rules, the SEC hopes to clear a path for the courts determining their legality to come to a faster conclusion. However this shakes out, it’s sure to have an impact on public companies, and investors will need to pay close attention.
4. What Effect Will Stricter Regulations Have on Global Supply Chains?
The supply chain is an essential part of many modern businesses. These complex, often-global networks help companies produce and manufacture products quickly, efficiently, and effectively. However, the vast majority of a company’s greenhouse gas emissions are often attributed to the supply chain, which makes it an easy target for stricter environmental regulations.
For example, regulations on greenhouse gas emissions reporting (like the ones proposed by the pending SEC climate rules) may impose fines or penalties on companies with emissions exceeding a certain threshold. To avoid these penalties, companies will need to pay closer attention to their supply chains, which could come at a cost. ESG investors will want to keep an eye on what these stricter regulations will have on companies, as well as how quickly and easily companies are able to comply.
How to Build ESG Investing into Your Portfolio
As ESG becomes more mainstream, investors looking to build out an ESG portfolio have more options than ever before. But having more options doesn’t necessarily make things easier–especially if you’re a DIY investor. As you build out your portfolio, here are three tips to get started:
- Determine your values: It’s important to reconcile your own values with those of the available ESG companies or funds. Before you do any research, set your own criteria to determine how to narrow down your options.
- Research where to invest: Seeking out reviews from an independent research firm like Morningstar can show you how a company or fund scores in terms of ESG investing factors.
- Seek out professional help: Working with a financial advisor can help ensure that not only are your values taken into account, but you also build out a well-balanced, diversified portfolio that considers all your financial goals and risk profile.
Whether you’re a veteran ESG investor or just starting out, there’s a lot to consider this year. Reach out to a Wealth Enhancement Group advisor today to learn more about how to build your values into your portfolio.
