ESG Investing - (Environmental, Social, and Governance)

Making Smart Decisions with Josh Tirado

Josh: This is Josh Tirado, and this is the making smart decisions podcast. Today, we are going to dive into ESG investing. So ESG investing stands for environmental, social, and governance investing. It refers to a class investing that is also often called sustainable investing. This is more of an umbrella term for investments to seek positive returns while having longterm positive impacts on society, the environment, or the performance of ethical businesses at the same time, oftentimes in the past, this was just called socially responsible investing.

[00:02:13] A lot of times people see the term SRI or sustainable investing. In its early years, it was mostly focused on green companies and green energy companies back in the day. what that meant was while this was a worthwhile noble investment in a noble cause. The performance was not very good.

[00:02:35] The problem is when you just want to focus on nothing but green companies, you are really narrowing your pool of investment companies, investment choices. So they tended to be smaller companies, startups, riskier companies because of their size and their relative youth in business. And also they're all focused on the same industry.

[00:02:53] So you were really into this one niche. And if that niche didn't go well because of the current economic cycle or news, all of your green investments would suffer.

[00:03:04]So it became a problem. And this was early on when I started trying to use these investments with my clients that cared about this was we had to put aside a certain pocket of their investments to say, okay, this is going to be more aggressive, and this is going to be focused on green. And we still are well-diversified with the rest of the portfolio.

[00:03:25] That has evolved substantially over time. Things are just no longer just green investing. Now can have sustainable investing, which happens in a myriad of ways, not just energy. Okay. You can look at energy. You can look at forestry. You can look at waste management. There's a number of things. Also, this gave rise to

[00:03:41]a level of investing that oftentimes had social moral or religious filters attached to it. So you're investing with certain principles from the Bible, certain principles from the Koran, or just things you didn't want to get into. There was a category of investments where they did not invest in anything that touched:

[00:04:02] firearms, tobacco, alcohol gambling, and some cases even nuclear energy. So there are all these different filters and different ways of investing that you can do now to have your investments being in line with your core beliefs. Things have become easier over time. Things have become more diverse over time and the returns have become better.

[00:04:23] But in general, this type of investing, let me just caution you, I've seen work best for some of my older clients who have more money or clients in general who have more money because oftentimes once you narrow the focus down. So tightly to your chosen area of sustainable or social or governance or whatever you want to do within the ESG world

[00:04:50] you're limiting the scope of what you can invest in as far as different size companies, different types of companies. And it becomes very niche-focused. So when I see people doing this, even to this day, they're more concerned about, yes, I want to return, but I want to have a positive social impact, but it will not necessarily maximize the return on their money.

[00:05:10] So we had to make sure they have enough money to accomplish their goals or enough of their money is invested aggressively enough or appropriately enough to get them the overall return they need. And then this is a piece of money. That is in line with their beliefs and makes them feel good. And we still try and get a return, but generally speaking, the return on investment in this category will trail.

[00:05:32]Other investments and protect and potentially more, more traditional type investments. This will trail, this has been changing over time. It's going in the right direction, covering more and more investment options, more and more money managers or doing it. They're offering more ETFs based on this more mutual funds based on this.

[00:05:48] So it is very interesting, but I think it's a very important decision and discussion to have. With your financial professional as to how this complained to your portfolio. I do not think that this should be your entire portfolio, and I don't want to rub anyone the wrong way, because I don't think you should invest going against your beliefs.

[00:06:08] But at the end of the day, there very well may be a trade-off between your beliefs and the performance of the investments. And you just need to know that going in. And take proper precautions and do some proper planning around it. So it's a great niche of investing, but again, you have to be, you have to be careful,

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