How to Build Your ESG Portfolio

Tom Sedoric and Casey Snyder

ESG investing is a trending topic in today’s financial investment marketplace. We’ve spent an ample amount of time talking about it ourselves here at The Sedoric Group. And that’s because ESG investing is proving to be quite viable. A recent Natixis study shows that roughly two-thirds of institutional investors report that ESG investing will become an industry standard by 2023. It’s the wave of business future that is already here today. At its root, ESG (Environmental, Social, and Governance) investing is a way of influencing business practices and decisions by speaking with your dollar. It’s how investors frame an ethical portfolio for themselves by simultaneously doing some good for the world surrounding them. 

So how do you build an ESG portfolio? 

On the surface, it might seem simple. But it’s important that you have an in-depth conversation with your financial advisor and understand the risks at play when making a transition if you’re not already on the ESG track. If you’re a new investor, this switch is likely easier than a seasoned investor who is nearing retirement and has accumulated wealth from their already well-defined investment portfolio, which has been compounding interest for years now.

Be Mindful Of Your Current Defined Financial Goals Before Incorporating ESG Into Your Portfolio

As important as ESG is for the principles it speaks to, it’s imperative that you’re not jeopardizing your financial future by making too drastic a switch if you are nearing retirement age. The good news is, there’s already a safe chance your portfolio includes ESG initiatives—it’s been a working piece of the equation for decades now. So, again, have a conversation with your financial advisor before making any decisions that could negatively impact your goals. 

We like to position with our client base that ESG, and any investment you get involved with, ought to be a working piece of an inclusive financial strategy. Being mindful of things like tax efficiency related to your financial health is an absolute must. The investment strategy that is exclusive is one that may be compromised as markets, tax and estate policies, goals, and life, shift day in, day out, and year after year. A sound portfolio ensures that you’re not keeping all your eggs in one basket—for if that basket were to give way, you’d be left with a real scrambled mess. That said, we are very much proponents of the ESG movement. 

Grade All Three Components Of ESG When Planning Your Strategy 

There are variables to consider at every juncture when building an ESG portfolio, so it’s essential to find the best mode of effectively weaving it into the entirety of your investment strategy. As you dive in, score companies defining themselves as ESG investment opportunities by each of the focuses that make up ESG at its core. Get an understanding of how the company is working towards operative goals surrounding Environmental, Social, and Governance vantage points.

ESG At A Glance

The Environmental aspect of sustainable investment opportunities is defined in relation to the way a company conducts business with non-renewable resources, climate, and clean energy initiatives in mind.

The Social aspect of sustainable investment opportunities pertains to the civic causes related to human rights and diversity concerns and the ensuing proactive initiatives the company takes to help in a positive, constructive manner. These might include topics like gender equality and applicable support for underserved populations.

And finally, the Governance aspect of sustainable investment opportunities takes a strategic look at how companies are managed and what those management teams are doing to promote business ethics, trust, transparency, and compliance in their respective marketplace. The idea here is that people come before profit, and, with ethics guiding the way, business is bolstered because people like getting behind a company that is “doing right” on its own.

If you’re focusing on just one of those three items, you’re leaving yourself susceptible to oversaturation in one area over the others. The real cream of the crop lies within the companies looking at ESG from a holistic perspective. If you’re looking for a place to start, consider the Governance aspect. Chances are, if a company is led by a management group that has ethics as its primary driving force, they’re likely thinking about the other two areas organically. 

Diversified ESG Portfolios Are Imperative

If you've been investing for any amount of time, you know that a diversified portfolio is the best mode of putting your money to work for you to mitigate the inherent risk of market shifts. If you've been investing for 25 years or even for just the past decade, chances are good your portfolio has tilted towards ESG principles due simply to the fact that companies are more focused on corporate social responsibility. It's primarily been the way of the business world as of late. Investors and consumers alike are pushing corporate moral change forward with how they're doling out their dollars, and business leaders are taking notice. 

So while you may get the sudden urge to "go all in," we've already discussed why you should reconsider. As we've mentioned, there's a good chance your money is working to do some good anyway. Have a conversation with your advisor, and they can show you exactly where your money is and how it's working for both you and the world around you.

You can learn more insights about ESG investing when you download our free white paper here.

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