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ESG Investing: Paying Off in the Future While Building One

[Updated: Mar 31, 2021 ] Mar 05, 2021 by Marc Rapport
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So, while climate change is heating up the world we live in, investing in companies that help combat that existential threat as well as do social good in general is turning out to be good business.

At least there’s $51.1 billion in new money that thinks so, says a new report from Morningstar cited in a recent article by CNBC, "Money Invested in ESG Funds More Than Doubles in a Year." That’s how much cash mutual funds that follow ESG principles netted in 2020, the report says.

ESG is an acronym for environmental, social, and governance. ESG investors evaluate their investments by using those criteria to keep their portfolios as socially responsible as possible.

"The idea is that not only can you achieve strong investment returns, but you can also find sustainable investment opportunities that are beneficial to employees and society as a whole," Millionacres’ Matt Frankel explains in this primer, "What is ESG in Real Estate Investing?" He points to some real estate investment trusts (REITs) as examples.

What passes for ESG can be subjective, but here’s help

Passing ESG muster, like beauty, is in the eye of the beholder to some degree, but you don’t have to go it alone. The Forum for Sustainable and Responsible Investment, for example, maintains a list of funds and ETFs that meet its ESG criteria. You can check them out, including their performance, here.

Momentum is building. That inflow into funds accounted for about 25% of all new money into U.S. stock and bond mutual funds in 2020, Morningstar says, compared to just 1% in 2014. That trajectory can be expected to continue under a Biden administration that may make it easier to invest in such funds through 401(k)s and direct U.S. policy (governance) more in sync with environmental policies being adopted across much of the world.

And don’t forget social issues like diversity in the workplace and civil rights in general. Even organizations as mainstream as the National Association of Realtors has made such issues an imperative.

Millennials about to start driving this magic bus

Plus, our biggest generation coming up has ESG principles in mind, says Joe Hale, director of sustainable investing research at Morningstar.

He notes that millennials, people between the ages of 25 and 40, are now coming into their own, with money to invest themselves and growing roles in decision-making positions at endowments, pensions, and other institutional investors.

"We’re seeing so much money flow into [ESG funds] because we see investors enthusiastic about the concept," Hale told CNBC. "They have these sustainability concerns and are starting to realize we can address those through our investments."

ESG advocates will naturally want to insist that these kinds of investments are lucrative as well as responsible. Again, that can be kind of subjective, depending on the stock or fund, as well as what you, yourself, or the list you’re looking at considers ESG-worthy.

That said, here’s just one example of how they’re doing: "ESG Funds Outperform S&P 500 Amid COVID-19, Helped By Tech Stock Boom." And here’s some Motley Foolish thinking about three specific funds.

The Millionacres bottom line and convenient truths

ESG investing lends itself naturally to long-term thinking and buying. Motley Fool’s John Rotonti and Alyce Lomax point to several companies that meet the criteria and note that having those traits can be indicative of a company that has top-notch management that’s positioning their company for the years ahead.

"After all, concern about ESG factors goes hand in hand with long-term thinking, and the ability to consider far-out outcomes demonstrates a clear vision," they say in an in-depth piece titled "What is ESG Investing?"

"Thinking about how a business impacts various stakeholders requires a level of holistic, creative thinking that shouldn't be underestimated as a competitive advantage," Rotonti and Lomax write.

Makes sense. A company building itself a sustainable future is not only counting on a sustainable environment, both climatically and socially, in which to operate for years to come, but helping create it.

Bottom line, there are many publicly held companies that tout their adherence to those principles, and a lot of lists to check out that appraise their prospects and ESG cred. Looking to choose just one, it’s hard to resist "Top 10 ESG Stocks Al Gore’s $25 Billion Hedge Fund is Buying."

Here’s hoping all your ESG investments prove to be convenient truths.

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