If you’re a savvy investor, you may have heard of ESG (environmental, social, and governance) and ethical investments. Both terms are often used interchangeably.
However, there are some critical differences between them that you should be aware of before investing your money. Let’s look at the differences between ethical and ESG investments so that you can make the best decision for your portfolio.
What is ESG Investing?
ESG investments are focused on environmental, social, and governance factors. These investments are meant to support companies with practices that protect the environment or benefit society.
ESG investments also prioritize corporate governance, focusing on companies with good management practices and transparency. As a result, a growing number of funds are available for investors who may want to incorporate ESG into their portfolios.
What is Ethical Investing?
Ethical investing also focuses on positive impacts on society — but it takes things one step further than just environmental protection or governance concerns. With ethical investing, investors will select stocks based on specific ethical criteria that align with their values.
These may include religious beliefs or political ideologies, among other things. Unlike ESG investments which tend to have lower returns than traditional investments, ethical investments often yield higher returns while still impacting areas that are important to investors personally.Â
ESG Investments Usually Have Lower Returns Than Ethical Investments
One of the primary distinctions between these two types of investments is that ESG investments tend to have a lower return than ethical investments due to their rigorous screening criteria since ESG funds are typically screened to ensure they meet specific environmental, social, and governance standards.
This tends to limit their potential for higher returns. Nevertheless, despite being lower in terms of returns, many investors choose ESG funds for the peace of mind that comes with knowing their investments align with their personal values and make a positive difference in the world. This reason alone is often enough assurance that an ESG investment will be worth it in the long run.
It’s Important To Do Your Research
When investing in ethical or ESG options, it’s essential to do your research. Failing to understand the details associated with a particular investment can lead to costly mistakes. Taking the time to read up on the company, its policies and procedures, and how its been performing over the past few years are all essential steps in making sure you know exactly what you’re getting into before you take the plunge.
Additionally, because this type of investing often has a social investing component, it’s also important to be aware of any additional implications or benefits that may take time to be obvious. Finally, doing your research will help ensure a well-informed decision that allows you to make an investment that feels comfortable on an emotional level and is good for your portfolio.
The Ins And Outs Of ESG investments & Ethical Investments
When determining whether you want to invest in an ESG, an ethical fund, or both — it’s essential to consider what types of businesses or activities align with your values and determine whether an ESG investment or an ethical investment would benefit you in the long run.
Ultimately, both types of investments can help make a positive impact while allowing you to earn profits from your portfolio over time. It all depends on what matters most to you as an investor.
