I often get clients and friends asking about “good” investments or “bad” investments . . . or ESG investments. Generally, my answer is always the same. It depends on your goals. Some investments might be great choices for a young investor who is able to add money every month to their account and the same investment might be really bad for a retired client on a fixed income that needs to draw money from their account every month.
So, should you own ESG investments? First let’s look closer.
What does ESG stand for?
Here are some things ESG looks at:
Environmental | Social | Governance |
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What Are Environmental, Social, and Governance (ESG) Criteria?
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Sometimes, the term sustainable is used in the same breath with ESG. As is often the case, the label "sustainable" means different things to different people. Many investment research organizations are creating sustainability rating systems to help their clients evaluate various investments. But, it’s complicated. There are a lot of variables and the way some variables are measured is up for debate. It’s important to understand your investing goals, and how sustainability measure fit with your goals. Then, its’ critical to understand the process your experts use to screen and rank investments on various factors. So where do you begin?
Risks and Benefits
The opportunity is to receive the same investment returns while helping make the world a better place. The risk is that by limiting your investment holdings, or excluding certain kinds of companies, you may be reducing your overall investment return. Traditionally, financial planners have encouraged investors to invest in the best performance and do good works with your investing profits. Today, many investors are looking for ways to reduce the risk and increase the benefits while they invest.
What is Greenwashing?
Greenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly.
For example, companies involved in greenwashing behavior might make claims that their products are from recycled materials or have energy-saving benefits. Although some of the environmental claims might be partly true, companies engaged in greenwashing typically exaggerate their claims or the benefits in an attempt to mislead consumers.
Where to Begin?
If you are serious about adding socially conscious investment criteria into your financial planning process, a good place to start might be to look at Morningstar Inc.’s Sustainability Rating Methodology.
And, maybe it’s a great topic for a discussion with your Certified Financial Planner™ professional. With experience, training and access to resources your CFP® professional can be a great help as you make a plan to reach your family’s goals while using sustainable investments.
Yes, I’m a CFP® professional and yes, I’m happy to talk with you about how socially conscious investments fit into your financial plan. Follow this LINK to find a time for us to talk.
If you would like to talk to more excerpts a great place to start looking for great advisors is right here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.