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Gen Z author: The ins and outs of ESG investing

Ella Gupta is the 16-year-old author of the recently released "Gen Z Money $ense: A Personal Finance and Investing Guide." A high school student in North Carolina, she is also the founder of the Initiative for Financial Literacy Exploration (iFLEX) and a 2020 finalist and Power Pitch Winner in the International Conrad Challenge.

Her interest in personal finance and investing was sparked at 10 when she sold Rainbow Loom bracelets and invested half her profits in the stock market and donated the other half to a pet charity. Her goal is to democratize financial education so that everyone is empowered to take charge of their financial futures and live out their dreams.

Perhaps you donate, volunteer, protest, and avoid plastic water bottles to make the world a better place. But what if you could make the world a better place and grow your money at the same time?

Environmental Social Governance (ESG) investing entails factoring in a company’s practices as they relate to environmental impact, interaction with stakeholders, and corporate management.

In 2020, $51 billion flowed into sustainable funds, which was more than double the 2019 total. And younger investors — like myself — are increasingly interested in this way of investing. According to Bank of America, 80% of Gen Z considers ESG criteria when making investment decisions.

“Socially responsible investing directly aligns with my goal to contribute to a more sustainable future,” said Ava Lathan, a freshman studying business at UNC Chapel Hill. “I feel that it is important to invest in companies that share my values and visions for the future.”

Let’s dive into this socially conscious way of investing.

Close up of a group of friends enjoying time together at the beach
(Photo: Getty Creative) (Marko Geber via Getty Images)

E = Environmental

The environmental component is tied to how a company impacts the earth. It includes factors such as product recycling programs, water conservation and usage, carbon footprint, use of renewable energy, and environmentally friendly products.

S = Social

The social component is rooted in a company’s interactions with its stakeholders. Stakeholders are parties who are involved with the business, including employees, suppliers, and customers. This element encompasses hiring practices, company culture, product safety, data privacy, and history lawsuits.

G = Governance

The governance component relates to company management and includes such factors as executive compensation, transparency in communicating with stakeholders, and political donations.

Benefits of ESG investing

Ella Gupta, a high school student in North Carolina, recently released her book explaining personal finances to her generation. (Credit: Ella Gupta)
Ella Gupta, a high school student in North Carolina, recently released her book explaining personal finances to her generation. (Credit: Ella Gupta)

As millennials and Gen Z have begun investing in the stock market, a wave of interest in sustainable and ethical investment options has flooded Wall Street. ESG does not only benefit the planet and society, though — it also has tangible benefits for your wallet.

Following an ESG framework can reduce investment risk. For example, a company that engages in ESG practices may be at reduced risk for lawsuits and employee turnover, which would require it to spend money hiring and training new employees.

Many perceive socially conscious investing as synonymous with compromised financial returns. However, that’s not accurate. Bank of America found that if one invested in companies with above average social and environmental principles, the investor would have avoided over 90% of S&P 500 bankruptcies from 2005 to 2015.

In 2020, some equity funds tracking companies engaged in ESG practices outperformed the S&P 500. The S&P 500 returned 16.3%, while the Vanguard ESG US Stock ETF returned 25.71% and the iShares MSCI USA ESG Select ETF returned 24.64%.

Many big tech companies, such as Microsoft and Apple, have committed to carbon neutrality and are at the forefront of the ESG paradigm shift. These tech companies are some of the largest holdings in many sustainable equity funds, which led to outsized returns in 2020.

How to Follow an ESG Framework

The cover of Ella Gupta's recently released book on personal finances for Generation Z. (Credit: Ella Gupta)
The cover of Ella Gupta's recently released book on personal finances for Generation Z. (Credit: Ella Gupta)

You may choose to invest in individual stocks or purchase ETFs and mutual funds. While some ESG ETFs provide broad market exposure, others have specific thematic focuses, such as the SPDR SSGA Gender Diversity Index ETF (SHE) and the Invesco Solar ETF (TAN). Fund managers may select the most societally friendly companies in a particular sector, or may eschew an entire industry altogether.

Rating systems developed by financial firms, such as Morgan Stanley Capital International (MSCI), evaluate companies’ abilities to manage industry-specific ESG risks. While purchasing a fund can be convenient in that you don’t have to research and scrutinize individual companies, there’s no guarantee that each company in the fund will align with your personal values. If you invest in a fund, be sure to pay attention to its holdings. Some robo-advisors enable you to adjust your portfolio so you allocate more funds toward particular causes.

Ultimately, ESG investing enables you to grow your money while supporting companies that align with your values and your vision for the world. Your investment dollars can help shape the world you envision and accelerate meaningful change in an impactful way.

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