Would you be surprised if I told you that every dollar you spend, save or invest has an impact on you and on the world around you?

Financial wellness is all about using your money in a way that aligns with your values, goals, and priorities.  The idea is that you are in control of your money.

For years women have been told that our only option to do good with our money is to save and someday hopefully have enough to donate to causes we care about.

There is a better way.  It’s called ESG investing.  I believe that money can be used to both grow your wealth and bring economic and social change through ESG investments.

My hope is that after reading this post you will get a better understanding of ESG investing and feel more empowered by every financial decision you make.  Let’s dive in.

What is ESG Investing?

ESG investing is a rapidly growing category of investment options that consider environmental, social, and governance factors along with traditional financial evaluations.  You may hear the term used interchangeably with “socially responsible investing” and “sustainable investing”.

Research is increasingly showing that ESG investing can reduce your overall portfolio risk, generate competitive returns, and help investors align their portfolios with their values.

ESG Factors

Investors are increasingly applying the following non-financial factors when evaluating investments for their portfolio:

E is for environmental

Environmental factors relate to the conservation and protection of the natural environment.  They include:

• Climate change and carbon emissions
• Air and water pollution
• Biodiversity
• Deforestation
• Energy efficiency
• Waste management
• Water scarcity

S is for social

Social factors cover relationships with employees, suppliers, clients, and the community.  They include:

• Customer satisfaction
• Data protection and privacy
• Gender and diversity
• Equal employment opportunities
• Local community impact
• Production quality and safety
• Labor standards and employee relations

F is for governance

Governance factors relate to standards for company leadership, risk controls, and shareholder rights.  They include:

• Board independence and diversity
• Accounting and tax transparency
• Bribery and corruption
• Executive compensation vs. employee pay
• Lobbying
• Ethical business practices
• Whistleblower schemes

ESG Performance – Resilience Amid Uncertainty

Many people believe that with ESG you are sacrificing investment returns, but that’s not the case.  ESG investing is not charitable giving.  It is possible to do well financially while doing good socially.

In fact, ESG investments have been outperforming traditional ones in 2020.  Even the world’s largest investors seem a bit surprised at how much downside protection ESG funds have offered during the coronavirus crash.

A study from BlackRock found that more than three-quarters of sustainable indexes did better than traditional indexes in market downturns from 2015 through 2018.  During the first quarter of 2020, 94% of sustainable indexes outperformed.  Last year, shares of the 100 companies on Barron’s “America’s Most Sustainable Companies” list returned 34.3% on average, beating the S&P 500’s return of 31.5%.

Despite the wider economic downturn due to the COVID-19 crisis, sustainable investments have managed to weather the storm reasonably well.  Why?

First, the obvious answer is oil.  ESG portfolios have low exposure to fossil fuel assets for environmental reasons.  This protected ESG portfolios when oil prices collapsed this year.

Second, the deeper answer is better supply chain management and corporate governance.

ESG – A Growing Investment Opportunity

COVID-19 pandemic could be a major turning point for ESG.  It highlighted how companies are built to respond to crisis and support its employees, customers, and communities.

J.P. Morgan surveyed investors with combined assets of more than $13 trillion.  They found that 50% thought COVID-19 could mark a positive move for ESG momentum over the next three years.

The recent positive trend behind ESG investing is fascinating.  In 2019, $21.4 billion went into sustainable funds, with deposits growing to $10.5 billion in first-quarter 2020 alone (according to Morningstar).  One out of every four investment dollars is in socially responsible investment (according to a study from the US SIF Foundation)!

Many investors are viewing the COVID-19 pandemic as a wake-up call.  We need a different approach to investing that considers the company’s environmental, social, and governance performance alongside traditional financial indicators.

Just think about it – for the past 12 years, investors have experienced two major economic downturns.  The financial crisis of 2008 was governance-related.  COVID-19 crisis – social and health-related.

ESG Is Missing from Retirement Funds

Despite the positive momentum behind ESG investing, ESG funds are still largely missing from retirement plans.

Before the market crash in March 2020, $9 trillion of the U.S. retirement assets accounted for 33% of all household wealth.  That’s the biggest pool of investable assets.  However, only about 3% of 401(k) plans offer the option of investing in ESG funds.

If you feel like you would like to invest a portion of your retirement dollars in ESG funds and your employer doesn’t offer this option, ask for it!  This is your future and your investment dollars.

Getting Started

If you are interested in ESG investments, you should start by understanding the options available.

I’ve put together a list of America’s top 50 sustainable companies and a lineup of equity ESG ETFs offered by Vanguard and Fidelity.  You can download the list below.

Whatever investment vehicle you choose, remember to diversify your portfolio.  These days, you can access the vast majority of asset classes, from equities to bonds and alternatives, via ESG products.

Additionally, I would recommend opting in for a mix of ESG and non-ESG options.  Don’t put all of your eggs in the ESG basket.  Even though ESG is gaining momentum, most of the investment options available are not as large and liquid as their traditional counterparts.

For example, in my personal investment account, I split my U.S. equity allocation between VTI (Vanguard Total Stock Market ETF) and ESGV (Vanguard ESG US Stock ETF).  VTI is a much larger ETF – it has $150 billion in net assets vs. $1.7 billion for ESGV.  Also, VTI has a significantly lower expense ratio – 0.03% compared to 0.12% for ESGV.

Hopefully, over time ESG vehicles like ESGV will grow significantly in size and will lower its costs so I could increase my allocation to ESG assets.

If you are not a DYI investor, I would highly recommend opening an account with Ellevest.

Ellevest is an investment platform that was created by women, for women.  They are highly focused on impact investing and will help you come up with a portfolio that is going to align with your values and help you reach your money goals.

The Bigger Picture

It’s no secret that climate change, poor governance, corruption, unequal pay, lack of gender diversity, and the recent COVID-19 pandemic disproportionately impact women.  By investing in companies that care about the environment, value transparency and good governance, and promote social responsibility you help advance women around the world and narrow the gender investment gap we face today.

Rather than listen to the naysayers and old-school financial advisors, learn more.  Then, take action to align your investments with your values.

Grow your wealth and change the world with your money – one investment at a time.

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