Did you know that companies with higher ESG ratings are better investments? You may wonder what this means for you. What is an ESG rating and how does the metric reflect on how a company is managing its products or services?
ESG stands for environmental, social, and governance. Therefore, ESG factors set the precedence for how a company operates socially and environmentally. Socially responsible investors use the ESG metric to help them determine which stock selections to make.
The ESG Score and Socially Responsible Investing
According to researchers, the higher a company’s ESG rating, the better for socially responsible investing. Moreover, high ESG-rated firms show lower debt costs and have growth plans that meet public expectations.
That’s because the focus is on making things equitable – both socially and ecologically. When a company makes these initiatives part of its plans for growth, it also makes everything fairer for people across the globe. You can learn more about creating a socially responsible portfolio by visiting a site such as humankindfunds.com.
How Socially Responsible Companies Set their Goals
Socially responsible companies focus on goals, such as reducing waste, cutting pollution, reducing the carbon footprint, developing sustainable products, and funding education. They don’t want their operations to throw anything off-balance or to create a problem that leads to disease, health issues, or environmental concerns.
Right now evolution is going on – one that is making investors aware of the social and ecological consequences of investing in the wrong companies. To lower the use of fossil fuels, embrace renewable technologies, and improve the ability of people to receive basic necessities, companies must redirect their operational objectives.
How to Make the Switch to Social Responsible Stock Choices
To switch to a more socially responsible portfolio, research the companies where you want to channel your investments. Find out more about their management and what initiatives they’re following to practice more socially responsible activities.
The idea behind socially responsible investing then is to combine profit with a purpose toward corporate social responsibility (CSR). CSR allows businesses to find ways to benefit others ecologically and socially while they pursue their company’s finance goals. These goals might include increasing shareholder worth and making expansions that will lead to earnings growth.
Making Profits through Socially Responsible Practices
In fact, some companies have set up departments to handle their environmental and social initiatives by using the expertise of C-level executives. One of these roles includes that of chief sustainability officer or CSO. Therefore, the objective is to make profits through the use of socially responsible practices.
Companies that represent socially responsible stocks then make their decisions based on how what they are doing affects the earth, people, and revenue. As a result, some of the most socially responsible companies today are also exceptionally profitable.
When a company makes the commitment to being socially responsible, it also gains the trust of the public – a trust that causes them to stand out in its field.
Socially Responsible Practices
Some of the practices a socially responsible company may undertake to include the following:
- Setting up the supply chain to reduce carbon emissions and pollution
- Using sustainable materials in the products they make
- Reducing the size of packaging to save on cardboard
- Investing money in research to produce innovative biotypes of materials
- Encouraging employees to give time back to their community – through volunteering or similar activities
- Awarding educational grants or scholarships for students who receive exceptional grades in computer, math, or science
- Creating foundations to drive changes socially and environmentally
The ESG Rating and How it Affects Social Responsibility
Naturally, if a company integrates social responsibility into its operations, its ESG score will reflect this activity. The ESG rating is based on a scale that goes from 0 to 100, with the highest score being 100. Any company whose ESG ranks 70 or higher is worth considering as an investment.
Certified B Companies
Also, look at companies that are classified as Certified B companies. For a company to receive this designation, it must change its corporate charter so it directs board members to make decisions based on the company’s workforce, shareholder returns, and social responsibility.
Examples of publicly-traded B corporations include Warby Parker, Patagonia, and Etsy. So, one of the things you might ask, as a socially responsible investor, is if a company has chosen to make this commitment.
Developing a Philanthropic Mindset
To switch your portfolio to one that is more socially responsible, you have to develop a philanthropic mindset as an investor. You also have to scrutinize a company’s ethics. How are they making a difference when it comes to the environment and society?
Are they making products or featuring services while carefully considering how they are impacting other people’s wellbeing? If some of your stocks are currently good performers but really do not focus on social responsibility, it’s time to switch them out.
Again, stocks with higher ESG ratings are more dependable in the long term, as research shows they have lower debt ratios and realizable plans for growth. They also do not negatively affect other people financially, health-wise, or personally.
How to Make Better Investment Choices
Ask yourself, when surveying stocks, “What is this company doing to make money while still producing a positive impact environmentally and socially?” “Are they focused on earning money but doing so to improve the world overall?”
By keeping a philanthropic mindset, you can invest in ethical stocks that will give back more than just higher dividends. The companies they represent will also improve the ways people live and work.
Investing in an ETF
If you’re not sure which stocks to choose, you might consider investing in an exchange-traded fund (ETF) that features socially responsible stocks. You can trade ETFs, just like stocks. This basket of stocks is diversified as well, which lessens investment risk.
Make the Decision to Invest and Make the World a Better Place
Whether you choose to create your own stock portfolio or wish to buy an ETF of socially responsible stocks. You’ll find making this switch to be both beneficial and profitable.
