Your 2021 Guide to ESG Funds

Many investors are tired of having to choose between investments that help the causes close to their hearts and investments that are good for their wallets. Environmental, social, and governance (ESG) funds are a powerful vehicle that splits the difference between socially conscious investing and panning for long-term financial well-being. They invest in equities and bonds based on how the organization issuing them work toward environmental, social, and governance factors that serve the mission of the fund.

This guide will walk you through everything you need to know about ESG funds, including what they are, an overview of common investing approaches, and a few tips to help you select the right one for your portfolio.

What Are ESG Funds?

ESG funds are equity and bond portfolios that prioritize environmental, social, and governance factors in their investment methodologies. They contain securities with a high sustainability score and exclude organizations with poor records on pollution, labor relations, or other ESG issues.

Investors can also use ESG factors as part of their due diligence to discover how organizations incorporate sustainability and social goals into their everyday operations.

ESG Criteria: What You Need to Know

ESG funds look at several factors to evaluate organizations against the goals of the fund:

1. Environmental

Organizations may attract significant ESG investments if they consistently try to help the environment and minimize their carbon footprint.

2. Social

This factor evaluates how organizations manage their relationships with workers, partners, and their communities. An organization that donates a percentage of its profits to a local charity, for example, advocates for the goodwill of others and may earn high marks from ESG investors, too.

3. Governance

Organizations that prioritize ESG value their shareholders’ input. They use transparent accounting processes and procedures, offer regular updates to shareholders, and encourage shareholders to vote on important issues. These organizations are well-governed and attract ESG investments.

Understanding how organizations incorporate ESG initiatives into their operations will help you decide between the different approaches to ESG investing and find the right ESG funds to fit your goals.

ESG Investing Approaches

There is no one-size-fits-all approach to sustainable investing. ESG funds can take several different approaches to identify equities and bonds that meet their requirements:

1. ESG Integration

ESG integration is a hybrid approach in which ESG criteria and traditional financial analysis are used to evaluate equities and bonds. The approach encourages investors to maintain a 50/50 balance where sustainability initiatives and other financial criteria are evenly weighted. This helps investors remain objective and make investment decisions that account for both sustainability and financial outlook.

2. Restriction Screening

ESG funds often shy away from organizations that have any involvement in firearms, tobacco, and other activities that do not support their goals. These funds use restriction screenings to identify disqualify organizations involved in activities, sectors, or locations that are objectionable to the mission of the fund.

3. Thematic Engagement

Thematic engagement refers to an organization’s involvement in themes and sectors dedicated to ESG issues. An organization committed to climate change, moving to low-energy sources, and embracing other ESG initiatives, for example, showcases the things it is doing to make the world a better place.

4. Shareholder Engagement

Direct shareholder engagement on ESG issues can drive ESG investing. Organizations are increasingly using direct shareholder engagement to develop and launch ESG initiatives. They can then leverage these initiatives to improve operations, boost revenues, and earn shareholder trust.

Investing in ESG funds simultaneously adds to your investment portfolio and promotes sustainability across the globe. Carefully analyzing ESG funds will help make sure you also realize significant returns on your socially conscious investments.


7 Tips for Choosing ESG Funds

The right strategy can make all the difference. Here are seven tips to help you decide which ESG funds will deliver the social and financial results you’re looking for:

1. Establish Goals

Consider what you want to accomplish with your ESG investment and formalize them as investing goals. These goals will help define your ESG investing strategy

2. Make a Plan to Reach Those Goals

Figure out how much money you have at your disposal and which ESG factors are important to you. Then make a plan to identify ESG funds with assets that will align your capital with organizations that share your values.

3. Diversify Your Investments

Resist the urge to put all your eggs in one basket. Choose ESG funds that spread out risk and maintain diverse investment portfolios.

4. Look at Recent Returns

Evaluate the recent returns of the ESG funds you’re considering to understand their past performance. These insights will give you a good idea about how the funds may perform in the months and years to come (although past performance is never a guarantee of future results).

5. Analyze a Variety of Resources

Perform a deep dive into ESG funds and the organizations that support them. Ask questions, conduct a thorough financial analysis, and identify the rewards and risks of any funds you are considering. Use multiple resources, so you get an objective look at their advantages and disadvantages.

6. Track Your Results

Monitor the results of your ESG funds. Stay the course if you feel confident in your funds, look elsewhere if your investment falls short of your expectations.

7. Ask an Expert for Advice

Partner with a wealth management services provider to gain additional insights into ESG funds and other investment opportunities. The provider can meet with you and teach you about all aspects of ESG investment. It can also offer a personalized strategy to help you accomplish your investing goals.

You can prepare extensively for ESG investing, but there are risks associated with any investment. Those who understand the pitfalls of selecting can limit their personal risk.

6 Pitfalls of ESG Fund Investments

Just because a strategy is right for some people or organizations doesn’t mean it’s right for all of them. There are a few things that can make ESG investing difficult, including:

  1. Wide-ranging definitions of ESG factors that can make it difficult to understand the fund’s goals and portfolio
  2. Inability to choose which ESG factors to prioritize
  3. Deciding how much to invest in ESG funds
  4. Finding the right balance between ESG factors and other investing concerns
  5. No standardized screening process for all ESG funds
  6. Lack of insight into how organizations promote ESG factors

You will find many ESG funds you could invest in. Work with an experienced wealth management service provider to find the ones that really do match your goals.

Talk to an Expert About Your ESG Investment Goals

Bogart Wealth can help you weigh the pros and cons of ESG funds and other investment opportunities. Contact us today to speak with an expert advisor who can help make your vision a reality.

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
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