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Investing in the Earth: ESG investing explained.

In recent years, climate change has taken center-stage as one of the most daunting, and recognizable issues that we face. We have seen increases in severe weather all over the world, ranging from devastating Wildfires in Australia and California, to intense winter storms in Texas.

It is widely reported that trends in increasing carbon emissions from the burning of fossil fuels are significantly raising the average temperature of Earth. This rise in temperature is causing crisis in the artic, melting our ice caps and raising the sea level. Look at the chart below showing the rise in Global Carbon Emissions from fossil fuels over the last century:

While I recognize there are some people out there with differing views on the significance of these trends, I believe that climate change may be the largest problem we face as a society, and we need to focus on fixing it. That is why and how I was introduced to the concept of ESG investing.

As awareness on climate change and other important socially responsible initiatives has grown in recent years, so has "ESG Investing", otherwise known as "Environmental and Social Governance Investing."

ESG investing focuses on putting your money into companies that have aligned values to your own. It has become a rising investment trend over the past decade, especially within millennials. I believe that as millennials grow in net worth and investing power over time, so will the value of companies that are focused on aligning their company values to ESG investors. Take a look at this chart showing the growth in total assets invested in ESG investments over the last decade (in BILLIONS $):

I myself hold ICLN as a core holding in my portfolio, which is an ETF focused on clean energy. The ETF holds 84 different companies that are considered to be leaders in their given field within the solar, wind, and other renewable sources. These companies are based around the globe, which also enables international diversification to the investment.

With the rise in ESG investing, there has been a heavy increase in mutual funds and ETFs that bring optionality to which causes you want to invest in, as well as which causes you do NOT want to invest in. Just last week I was talking with a friend about the options of investing a portion of their retirement income into an ESG related fund. An interesting dynamic to his investment view was that he was equally as concerned about what he was NOT investing in as what he was investing in. After doing some research we landed on Vanguard's ESG International Stock ETF ticker VSGX. This fund is an international fund indexing approximately 3-4,000 stocks around the world that not only focus on socially responsible companies, but excludes any company that does not meet the requirements or standards of Vanguard's view of social responsibility. The fund excludes companies that:

  • Produce alcohol, tobacco, gambling, and adult entertainment.

  • Produce civilian, controversial, and conventional weapons.

  • Produce nuclear power.

  • Do not meet certain diversity criteria.

  • Have violations of labor rights, human rights, anti-corruption, and environmental standards defined by UN Global Compact Principles.*

  • Own proved or probable reserves in fossil fuels such as coal, oil, or gas.**

I believe that the rise of ESG investing is a necessary step in the right direction to help advance our society. It also allows for other important social issues to be addressed including bettering diversity & inclusion in the workforce, as well as the conservation of human rights. While there is still a long way to go in these missions, having a way to both economically benefit, as well as see progress in the core values that align with your own beliefs is a great way to add to your investment portfolio.

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