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What are ESG stocks? And how to invest?

ESG stocks

ESG stocks have become popular as they often provide a higher degree of security compared to other traditional stocks. This is due to the fact that ESG-focused companies tend to be more resilient during periods of economic downturns, making them an attractive option for long-term investors. According to an MSCI report, ESG factor returns remained positive in 2022, despite a lower percentage due to the macro headwinds. The report has also mentioned that “ in recent years, higher ESG scores have been associated with lower stock-specific drawdown risk, as well as slightly better earnings growth and stsock performance." Therefore, investing in ESG stocks can help investors diversify their portfolios and reduce risk while still generating returns over the long term.

What Are Actually ESG Stocks?

ESG stands for environmental, social, and governance. It’s a way of investing in companies that are focused on sustainable practices and have an ethical approach to business operations. ESG stocks tend to be those companies that are considered more responsible than their peers. They have good corporate governance standards and focus on sustainability initiatives such as reducing waste, improving energy efficiency, and utilizing renewable energy sources. Investing in ESG stocks can be beneficial for both the investor and the environment, as it helps to create a more ethical and sustainable world.

Why Invest in ESG Stocks?

By investing in ESG stocks, investors can make a positive contribution to the world while still generating returns from their investments. By selecting companies that prioritize sustainability and ethical practices, investors can be sure that their money is not being invested in companies that are negatively impacting the environment or society.

Furthermore, ESG investing can have positive financial impacts as well. Companies that prioritize ESG criteria tend to perform better over time as they are able to attract more customers and employees and have improved operational efficiency. This may lead to higher returns for investors who invest in these companies’ stocks.

How to Invest in ESG Stocks?

Investing in ESG stocks is not as difficult as it may sound. You could either directly invest in individual high-scored ESG stocks or be exposed to a wider range of these stocks through ESG ETFs.

  1. Buy individual ESG stocks - Investors can research and buy individual ESG stocks directly from the stock exchanges. High-quality ESG stocks usually have high ratings based on their EST scores by institutional researchers. Interestingly, most high-rated ESG stocks are among the US big techs due to their low carbon footprint, high scores in social responsibilities, and high business transparency. According to MSCI ESG Ratings, the top four companies are Nvidia, Microsoft, Best Buy, and Adobe, all of which have AAA ratings.

  2. Invest in ESG mutual funds and ETFs - Investors can also invest in ESG-focused mutual funds or ETFs, which are collections of stocks that share common ESG criteria. SPDR S&P 500 ESG ETF is one example of an exchange-traded fund that allows investors to focus on companies aligned with responsible investing criteria. This fund focuses on companies that are performing well in terms of ESG criteria while also providing the potential for returns similar to those of a traditional S&P 500 index fund. The SPDR S&P 500 ESG ETF is designed to provide investors with exposure to large-cap stocks that meet certain environmental, social, and governance standards. The 10 top holdings of this fund include Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, UnitedHealth Group, Eli Lilly, and JPMorgan Chase, which account for 39% of the total assets.  

 

By taking these steps, investors can be sure that they are investing responsibly and making a positive contribution to the world with their money. However, ESG stocks are the same as normal stocks, which all take risks of loss and reward. Investors need to take other aspects, such as their financial health, growth prospects, macro environment etc. into account before making their investment decisions. 


Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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