Introduction to ESG Investing

Differences in public vs. industry perception; How to get started; & Other ways to infuse values into investments

ESG stands for environment, social, governance. ESG investing takes into consideration a company’s performance on these three criteria, in addition to traditional metrics like financials, when deciding whether to invest.

Getting started ESG investing is easy. Just look up a company’s ESG score online and decide whether its performance on the metrics you care about make it a suitable investment. Three research firms that provide their ESG ratings for free are S&P Global, MSCI, and Refinitiv.

ESG Scores Vary By Rating Agency

Because each research firm uses its own methodology, a company’s ESG rating varies by research firm. For example, Refinitiv ranks Facebook (now Meta) higher than Tesla (63 and 60*, respectively), whereas MSCI ranks Tesla better than Meta.** (MSCI uses an ABC grading scale, with AAA the highest and CCC the lowest. Tesla ranks A while Meta ranks B.) Each research firm provides its methodology online. It’s worth reading a firm’s methodology before using its ranking system to assure its priorities align with yours. 

*Rankings as of September 2021

**Scores from Fall 2021. In April 2022 it was noticed scores MSCI no longer has scores for Tesla Inc. or Meta.

Professional Investors & Industry View ESG as a Risk Management Measure

There’s an incongruence between the public perception of ESG investing and the financial industry’s perception. The public perceives ESG investing as a way to align your investments with your values. While this is true, the financial industry’s POV is that it’s a form risk management. Take for example a mutual fund investing in the tech industry. Tech companies use tons of water to cool their data centers. For the “E” component, the mutual fund is going to look at where tech firms’ data centers are located. It’ll consider tech companies with data centers located in regions with abundant water more favorably than those with data centers in drought prone regions. (Or in the case of Microsoft, companies finding ways to cool data centers without water.)[1]

Other Values-Based Approaches to Investing

ESG investing is one form of socially responsible investing (SRI). Other forms of SRI include exclusionary investing, thematic investing, and impact investing. If you’re dedicated to making your money build a better tomorrow, consider a portfolio that includes all these approaches!

[1] https://www.theverge.com/2021/10/27/22747394/microsoft-data-centers-water-drought-climate-change-energy-emissions