Methods to consider when settling for an ESG investing strategy

What is ESG? This is the lingering question for many investors. ESG is an umbrella term used by investors or investments seeking positive returns and long-lasting effects on society, the environment, and business. The name is broad without conclusive words to describe it. Some investors refer to ESG (Environmental, social, and Governance) as a sustainable investment, socially responsible investment, impact investment, etc.  ESG is also seen as a generic term in which investors check and evaluate corporate behavior, which determines the business's financial future.  Currently, investors are not interested in financial investment, but their products make in promoting global matters. 

ESG issues to consider 

Investors or market players should consider the following before investing in any business. 

• The Environment risk

The majority of business activities conducted tend to impact the environment negatively. They either pollute the air, water, or ecosystem. It's a risk to human health, meaning they don't align with the ESG factors, including managing the resources and ensuring they don't pollute the environment. The positive environmental factors should be minimizing all risk which might affect the surroundings. Companies are expected to lower the cost and increase profitability. 

• Social risks 

The social risk directly affects society; the companies should check on the risk. They should promote health and safety, protect human rights, and product integrity.  Investments should improve social risks by reducing turnover and absenteeism, productivity, and brand promotion/loyalty. 

• Governance risks 

These revolve around how the business is administered, covering corporate brand, independence, and diversity.  Governance positive activities include: checking the interest of shareholders and the management. 

ESG has different approaches that investors should understand about their business.  However, each approach has other objectives.  One should get the implementation method that fits your portfolio.  Today we focus on methods for incorporating ESG in your investment strategy.  The advantages and disadvantages of methods. These give clear consciousness when deciding the best for your investment. 

Methods to consider when selecting an ESG investing strategy.

1. Omission screening 

ESG is associated with the omission or exclusionary screen method.  It's a popular way that involves the elimination of various companies from your portfolio.  The process is based on the products and activities undertaken by the business. Which conflict with your values; this includes businesses associated with alcohol, gambling, weapons, etc. 

Advantages of omission screening

The process helps you stick and invest in your beliefs and values.  Some are based on religion, meaning you can eliminate products and companies contrary to your beliefs.  You can invest in your interests. 

Disadvantages 

The approach might be very harmful to the overall return of the business. It provides fewer opportunities to venture. The omission screen may give wrong impressions even to potential companies that might grow your finances. For example, in online market places (Amazon), you might reject the company since its selling alcohol. While as it has many other potentials besides the one negative product, you didn't like. 

2.  The best in class selection 

The approach is a better model of the exclusionary method. It's fair-minded compared to the first approach.  The method doesn't exclude companies for their products and activities. However, it uses the best in class selection. You have all companies and use the ESG factors to reward companies according to ESG metrics. 

Advantages

The method is not based on values and beliefs but excludes companies that don't fit the ESG factors.  It doesn't harm your performance or diversification. You can invest in any field which aligns with the ESG factors. 

Disadvantages

The method provides limited information since the ESG data is not standardized.  The information is derived from the company's self-report. Investors might invest in the wrong field, which affects their values and provide low incomes.  

3. Active ownership/corporate engagement

Active shareholders/owners use the power of ownership to influence the companies on the ESG issues.  They can change the behavior of the company using proxy votes.  Shareholders have a significant impact on any company and have the right to complain or change situations. 

Advantages

You can easily change activities in the company if you're an active shareholder.  

Disadvantages

To have more influence, you need to have a majority of the shares, meaning you have to invest more in the companies.  To make the change, you need to have a backup from other shareholders. Many owners don't invest time and don't show up for the meeting. These influences your opinion in the companies matters. 

4. Thematic investing 

The approach only focuses on a single ESG area such as clean energy, female leadership, and better Governance.  The funds will only select companies that focus on the sites chosen and leaving those that don't.  

Advantages

 The approach helps you focus your funds to particular companies and project which suit you. 

Disadvantages 

The funds in this method are not diversified and only work on specific projects and companies. These might discourage investors who want to expand their investment plans.  The technique aims at non-financial issues over financial. 

Investors can leap more if they understand the methods which work for them. Choose what provides a positive turnover and also don't offend your values.