Will ESGs be the Next Big Thing in Alternative Investing?

Not too long ago, investors would evaluate companies almost exclusively based on financial performance indicators. And while these factors remain important, investors today are increasingly interested in how a company performs when it comes to the environmental, social, and governance impact of its operations, or what analysts now refer to as "ESG." The trend has even begun to spill over into the alternative investment space, with investors browsing online investing platforms like Yieldstreet in search of the next ESG-friendly fund or investment opportunity.

So is ESG really the next big thing in alternative investing? To help determine this, let's take a brief look at how investors evaluate companies based on ESG principles, as well as some specific investment types that ESG investors are gravitating toward. 

What is the ESG Investment Strategy?

ESG investing is often referred to as a strategy, however, it's important to remember that when referring to ESG investing, the term "strategy" isn't used the way it normally is in the investment space (i.e. passive vs. active investing). Instead, ESG strategies are formed based on investors asking themselves a critical question: Is the investment I'm about to make in alignment with my personal values and priorities? Of course, personal values tend to be, well, personal, and we should keep in mind that ESG strategies will inherently vary depending on the individual investor.

So how do investors evaluate a company based on ESG? For some, it's enough to simply do their own research into a business, whether reading their annual reports or evaluating publicly available statements on ESG-related issues. For others, it may be easier to assess a business based on an actual ESG "score," or a rating given to companies by ESG research organizations, such as Bloomberg, JUST Capital, or Refinitiv

ESG Investing In Practice 

Once an investor knows what to look for, they'll need to decide what type of investment in ESG-friendly organizations they'd like to make. While ESG investment vehicles are evolving as the trend gains traction, at the moment, there are two primary ways of investing based on ESG principles:

Individual Stocks - Some investors prefer to manage their own portfolio of publicly traded stocks on the traditional market. Rather than simply evaluating a company on factors such as P/L ratios, however, they'll take the company's posture related to ESG issues into account, whether through their own investigation or on an evaluation performed by an ESG research firm. 

Publicly Traded ETFs or Privately Managed Funds - Other investors enjoy or prefer the instant diversification that comes with an exchange-traded or privately managed fund. In fact, the growing number of ETFs and private funds in the ESG space is primarily what's been fueling so much speculation about ESG as the next big thing in investing. And as firms continue to strengthen their understanding of what constitutes a profitable investment in the space, ESG funds could very well continue gaining positive momentum. 

Source: Yieldstreet

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Categories: Investments

Tags: Active investing, Alternative Investments, ESG, Passive investing, Stocks, Yieldsteet