How To Become An ESG Investor

Image credit: RoboMarkets

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To start investing in companies that work by the ESG standard, it is vital to understand what ESG is about.

What is ESG?

ESG investing is a form of socially responsible investing, i.e. when a potential investor decides whether to put their money in a company based on its impact on the environment and social development.

ESG stands for Environmental, Social, and Governance.

Under Environmental we understand environmental responsibilities, i.e. whether the company follows ecological standards and what it does to decrease greenhouse gas emissions.

Under Social, we mean social responsibilities of the business, i.e. how the company treats its employees, clients, suppliers, and the quality of its produce.

Governance highlights the quality of corporate management. It encompasses payments by contribution, anticorruption measures, gender diversity on the board of directors, transparent reports, and shareholder relations.

ESG investments became popular just a couple of years ago, although the idea of socially responsible investing originates in the 18th century. Since then, it has had its ups and downs depending on the situation in the world or a specific country.

Choice of broker

Before beginning to look for ESG companies, you need to decide on the broker through which you will buy the shares. One criterion will be the variety of shares traded on a whole lot of global exchanges. 

One option is RoboMarkets. There are over 12,000 shares and CFDs on shares available in the terminal, which are traded in the exchanges of the US, EU, and Brazil. You can opt for a web version that provides access to the trading terminal via any gadget's browser. This will enable you to immediately see your saved lists of shares and chart templates, thereby reducing your preparation time before trading. Apart from the web version, there are apps for Android and iOS. If you prefer automatic processes, the R StocksTrader investment platform offers a constructor of trading robots that helps you create an expert advisor from scratch, with no programming skills required.

Rating agencies

After you have chosen your broker, you can start searching for companies. There is no ready-made screener with ESG parameters online yet, so you will need to study reports by yourself to determine which element suits ESG standards. Alternatively, you can turn to rating agencies.

For now, there are no set standards to determine if a company qualifies for ESG. This means that each agency has its own criteria. Normally, issuers are rated like bonds: from CCC (the lowest rating) to AAA (the highest rating). While one agency might consider a certain company to be a leader, other agencies could place it in the middle of their rating lists.

ESG companies for investments

ESG ratings are formed by such agencies as Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI, Morningstar, etc. MSCI features an app that forms an ESG rating in real-time. AAA is the highest rating, and this is currently held by one single company - Abrdn plc.

Abrdn plc is a global investment company that manages assets.

On the one hand, the investment sector offers many more chances for following ESG standards than, say, the oil and gas industry. The company only needs to avoid adding companies with high greenhouse gas emissions to its portfolio.

However, an investment company needs to show investors its profits. The commodity market currently demonstrates high profitability, but there are many companies that cannot fulfill ESG standards. As a result, Abrdn plc totally excludes this sector from the portfolio, which undermines the profitability of investments.

What is going on with Abrdn shares most likely represents the current situation in the company. The shares have been in a downtrend since 2018, meaning that regardless of the high ESG rating, investors are not rushing to purchase them. 

Abrdn share price chart*

ZoomInfo Technologies Inc. ZI has an AA rating, and the situation is different here. ZoomInfo Technologies is a provider of software on a subscription, which gives access to its client base. Its shares are quite popular.

ZoomInfo Technologies share price chart*

The shares of HubSpot, Inc. HUBS, which also has an AA rating, demonstrates even more impressive growth. HubSpot, Inc. is also a company that develops and sells software. From March 2020 through December 2021, its shares saw a remarkable growth of over 800%, after which they corrected. Investors can now buy them at a much more affordable price.

HubSpot share price chart*

ETFs for ESG companies

ETFs are a more conservative investment option for ESG companies. In the US market, there were about 50 ETFs that were invested by ESG standards at the beginning of 2022. The largest one is Vanguard Information Technology VGT.

By choosing ETFs, one can also assess them by criteria:  iShares Global Clean Energy ICLN is more focused on environmental problems, while iShares MSCI KLD 400 Social DSI is more socially-oriented. For those who care about corporate management, iShares ESG MSCI USA ESGU might be one of the instruments to consider.

Conclusion

Some investors believe ESG investing is promising, however, this market has not been formed yet. In the EU, there are plans to adopt certain laws that will control the carbon footprint, and companies will have to choose between reducing emissions or decreasing profits. In this respect, choosing ESG investment options involves singling out companies that are focused on the environment. This is the area in which certain regulations might emerge soon, alongside a regulator that will be checking if companies are adhering to the set laws, regulations, guidelines, and specifications.

* - Past performance does not predict future returns

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.