Today we learn how to invest ethically or what it means ESG

As we know, our society is constantly evolving.
Investments need an evolution, in this case giving greater attention to what is sustainable for the planet.

In fact, until now there was no particular attention in investments regarding the ethics followed by companies and the only parameter concerned was the mere profit of money.
Investments defined ESG as Environmental, Social, Governance investing

This definition applies to companies that are in line with the new perception of the modern public attention to social and ecological problems of the planet.
These companies are the ones to keep an eye on and to own if you want to create an ESG portfolio, or ethical portfolio.

Going to see deeply the ESG acronym, this means:

E as Environmental, we consider the pollution produced by the company, energy consumption and the green or non-green footprint that the company itself has, for example in the production of carbon dioxide.

S stands for Social, which includes respect for the rights of the various communities, the provision of fair salaries to all employees without discrimination, aid to minorities and social management in the workplace.

G stands for Governance, which is the management of diversity within the working community.

Now, how can we make sure that we have a state-of-the-art portfolio?
We have two methods, with some differences to apply to our studies on possible assets to buy.

The first method, which we can define as “negative” or “removal”, involves our decision to remove from our possible purchasing choices those companies that have areas of interest such as tobacco, weapons, gambling, or are implied in fraud or minority mismanagement stories.
Once this selection is complete, the remaining companies will be our possible purchasing choices without further in-depth studies in this regard.

Otherwise we can use another method that we can define as “positive” or “inclusion”.
That is, we seek only actions that give local and environmental benefits or follow initiatives dedicated to improving the world and gradually eliminating their impact on the environment through, for example, the use of only renewable or sustainable forms of energy such as solar and wind energy.

Now chosen the method, you as a small investor or an ESG fund manager, after having roughed up the list of buyable shares, will make a purchase choice based on other technical parameters.
The ESG method is not a standardized system at the moment, in fact it has different criteria and different points of view based on the manager’s or purchaser’s thinking.
We might be surprised to find some fossil fuel companies considered ESG compliant, this is because they are among the various companies in the segment the most efficient on many parameters such as their excellent impact on the economy of the community where they operate.

Remember that the ESG scores assigned to the various companies can vary a lot due to the difficulty of analysis.
Companies have many partners, they have long and complicated supply chains and everything behind it is difficult to analyze in depth.
This leads us to talk about a phenomenon, like greenwashing or the cleaning of the reports created by the companies themselves.
This implies creating green initiatives that serve exclusively to have a better ESG score but that in reality do not impact on pollution or improve the life of the community.
There may even be ESG scam profiles, in which reports are artfully created for companies that actually have no ecological target.
In short, you would invest in a company that cuddles unicorns on paper, but which in reality unloads the used oil from their vans and truck into the river behind the shed.
So beware of gray areas.

Currently, the ESG profile has become a bit of an hype, so funds and ETFs have been created made exclusively by ESG companies.
This solves the problem of choosing but at a higher economic cost. On the other hand, fashions always cost a little.

Also be aware that ESG criteria limit your diversification, creating greater investment risk.
In short, we find ourselves at the end of a clash between ethical investing versus traditional investing
However, what concerns the ESG method can lead companies to make changes to their production and management methods, even leading them to be ahead of the legislation that will change in the future.
Customers themselves are also more likely to buy ethical products when they know about them.