During college and those early post-grad years, I spent every Thanksgiving in Chicago with my family. On Wednesday, I would fly in and go out with all my high school friends. Thursday was Thanksgiving with my family. On Friday, my Mom and I would cook Turkey soup with the leftovers. And on Saturday, we had a second Thanksgiving with our neighbors and would serve the soup as the main course.
About 5 years ago, I diverged from the plan. My best friend, Lucy, and I flew in late Wednesday night, so we couldn’t participate in our typical pre-Thanksgiving traditions. While we were disappointed, we reached out to all our friends and asked if they would be up for going out again on Friday. Everyone agreed and met up that night.
When we finally got home, we decided to scavenge for food while the whole house was still asleep. And that’s when we saw it – the soup. Lucy said,
“It’s literally 2 gallons of soup, no one will ever notice if we have a few bites.”
Next thing I knew, we were both on the floor eating the soup directly from the pot. About 30 minutes later, my mom came into the kitchen and screamed, “OMG, you ate the whole thing?” I swear we gave Joey Chestnut a run for his money that night, and yes we ate the whole thing. We went to bed ashamed and full of stolen soup.
And that leads me to today’s topic, Ethical Investing. Because sometimes, we can’t just keep taking from the pot. Sometimes we need to do the right thing – own up to our actions, and where possible, give a little back.
WTF is Ethical Investing?
Ethical investing refers to the practice of aligning your investments with your personal values. If this definition sounds vague, it’s because it is. The ethical investing community is still trying to define itself and the terms and standards in which they operate. Sometimes it helps to think of ethical investing on a spectrum. On one side, you have agnostic, market-based investments designed to maximize financial returns, on the other, philanthropic giving. In between those two sit a wide-range of investing strategies including basic ESG (Environmental, Social, and Governance) reporting metrics and screens, proactive sustainable business practices, and investing for impact alongside monetary return. For the purposes of our story, we’re going to start at the beginning with ESG investing.
Why are we talking about ESG?
ESG investing has been in the news a lot lately. That’s because as a planet, we’ve been going through A LOT and are looking for something to feel good about. ESG – environmental, social, and governance is often touted by marketers as a sustainable investment practice that can help you do (financially) well, by doing good.
What Does ESG have in common with Turkey Soup?
- They make you feel good – I’m not sure there is anything better than good food after a long night out. ESG investing is also gaining popularity, in part, because it makes investors feel good and ESG scores empower investors to ensure that their money is invested more closely in line with their values.
- They are HOT – I know this is probably one of my weaker jokes, but soup is HOT (or at least it is better consumed warmed up). ESG investing is also incredibly hot right now. In fact, U.S. assets under management leveraging ESG strategies grew to $17.1 trillion by the beginning of 2020 which is a 42% increase from $12 trillion at the beginning of 2018. So, while this doesn’t necessarily mean that retail and institutional investors are actually making more conscious investment decisions, the fact that companies are choosing to measure and report ESG scores indicates that at minimum, these companies are aware of their ESG impact, and the practice of reporting is only getting more popular. There’s even a new ESG controversy brewing on Capitol Hill, so you know this dish is on FIRE.
- They are unique – One of the reasons my mom was so upset about the soup was the complexity of it. Every year, we add tons of veggies, spices, and secret ingredients (butter), which results in a staple dish with a subtle, but unique flavor profile from year to year. Companies that choose to measure and report their ESG scores (yes, it’s still a choice), have an array of metrics to choose from. As a result, ESG scores are a complex mix and how those scores are measured within a company can also vary. In an effort to streamline the complexity, I’ve summarized some of the potential metrics that might be considered below:
- Environmental: This can include how a company mitigates greenhouse gas emissions, whether the products they create are sustainable, if they use natural resources efficiently, if and how they recycle, how much waste they produce, and more. What’s not factored into ESG scores? How much companies contribute to individual political candidates and lobbying campaigns supporting the fossil fuel industry. Confusing, right?
- Social: This might include factors like, does the business participate in community development, do they have equitable hiring practices that promote diversity and equal employment opportunities, do they provide benefits for parents, and the company’s general respect and treatment of basic human rights inside and outside the organization.
Governance: Governance (or corporate governance) refers to the company’s leadership and board, including whether the company has responsible business practices (whatever that means), the reasonableness of the company’s executive payscale (Sorry, Jamie), if the company’s board of directors is diverse, and whether it’s responsive to shareholders.
Note: If you want to check out a company’s ESG score, you can search the company name here: sustainalytics.
- Intention. The magic of the soup is not just in the ingredients (butter), but in the purpose of the soup itself. The soup is about showing up for your community. Each year, the soup continues to pay dividends for the neighborhood – we have stronger relationships, we stay connected, and we look out for each other. ESG investing gives companies and investors an opportunity to look out for our global community – by considering environmental, social, and governance factors, companies and investors begin to think about their place in society and their responsibility as members of our global community.
How Do I Invest in ESG Companies?
- Aura – Aura allows you to align your investments with your beliefs. Rather than just choose an ESG fund, we let you define what you believe in. Whether you want to screen out gun manufacturers and predatory lending, or amplify climate-friendly investments and empower women, with Aura, setting an impact screen is as easy as swiping right. Sign up for the waitlist or check your spot in line here.
- Individual Stocks – If you want to invest in ESG companies, you can do this by opening a brokerage account and analyzing individual stock ESG scores. You can do this by checking a companies ranking on sustainalytics or searching the following list for highest performing ESG companies.
- ETFs & Index Funds – If you want to gain access to ESG companies, you can start by opening up a brokerage account and searching for ESG funds. Some of the top funds for 2021 are here. This essentially means, you are investing in a group of companies with higher ESG rankings which are chosen by an asset manager.
- Robo Advisors – If you are interested in investing with an ESG focus but don’t want to spend the time picking stocks or individual funds, you can have a robo advisor do it for you. Check out some of the top ESG robo managers here.
- Wealth Management – If you already have a wealth advisor, ask them what offerings they have for responsible investing. Your broker may offer both public and private equity options for investing.
Things to Be Mindful Of
- Scoring System – ESG Investing is relatively new. Therefore, the scoring systems we use are not standardized. This means, you might review scores on different sites and the results may differ. Although we are moving towards standardization, this is taking time, so make sure to do your due diligence on companies and consider checking multiple sources.
- Proceed with Caution – If you’re just getting started, ESG investing is a great place to start, but proceed with caution. ESG reporting is still new and doesn’t have a single, streamlined process, which can make it difficult to make an apples-to-apples comparison of company ESG scores. Essentially, when it comes to ethical investing, ESG is the tip of the iceberg.
- ESG Investing versus Impact Investing – ESG investing is a form of sustainable investing that considers an investment’s financial returns alongside its overall impact. Essentially, every company has an ESG score. If you do conscious ESG investing, you consider these scores when making a decision. On the other hand, there is impact investing. This is the act of using money and investment for positive social results. For example, Facebook has a positive ESG score but is decidedly not an impact company. On the other hand, companies like Brandless and Bombas are impact companies as their bottom line has to do with making a positive impact. Essentially, an impact company will always have an ESG score, but a company with a high ESG score is not necessarily an impact company.
- Lower Risk – Companies with higher ESG scores tend to be less risky investments. In a recent study by Morgan Stanley, they found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of asset class.
- Identify What Matters to You – Although most ESG ranking systems will give you an overall score, it’s important to consider all 3 factors and which ones matter most to you. For instance, let’s say you care most about the environment and there are 2 companies with the same ESG score. One, however, might have a higher environmental score while the other has a higher social impact score. Given your preference, you may want to choose the company with the higher environmental score.
- Remember Fundamentals – Although it is clear retail and institutional investors are trending towards ESG investing, it is important to analyze stocks holistically. Remember the article here about how to pick a stock and conduct proper overall due diligence. Just because a company has a high score doesn’t automatically make it a good investment in terms of return.