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Trading by individual investors has become extremely popular during the pandemic, and data from S&P Global Market Intelligence reveals that retail trading levels remain higher than they were before the pandemic. However, many amateur investors might not realize that they can make a difference in the world simply by choosing stocks for their portfolio based on so-called ESG, or environmental, social and governance issues.
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In recent years, a major trend in the investment world has been an increase in preference for stocks with high ESG scores. As more and more individual investors trade using Robinhood or another trading platform without the help of financial advisors, they may start to wonder how to choose ESG-friendly stocks.
Here are some tips to help you choose companies with a strong sense of social responsibility.
Contents To display
1. Start with a list
2. Research actions
3. Analyze the information you find
4. Reconfigure your portfolio for ESG
Start with a list
Perhaps the easiest way to start is to look at an exchange-traded fund or ESG-focused mutual fund that publishes its holdings. These funds will give you an idea of where to start when trying to shift your portfolio towards more socially responsible investments.
All you have to do is run an internet search for “ESG mutual funds” or “ESG ETFs,” and a list of many funds to choose from will appear. Not all of these funds publish their holdings, but many do. You may understand why some of the stocks in these ESG-focused funds are listed here, but you may not have heard of others.
Either way, the next step is to research individual stocks to decide which ones address the issues you’re most passionate about.
Once you have a list of companies, you can search for each company’s ESG-related public statements. The easiest way to do this is to search using the company name and the words “ESG report”. This search should bring up the company’s reports covering everything from social responsibility and corporate citizenship to environmental and sustainability issues.
A search like this can also help you check out companies you’re particularly interested in, even if they don’t appear in the portfolio of an ESG fund you’re looking at. Researching a company’s ESG report should immediately show you its lack of ESG efforts or certain ESG-friendly activities that have flown under the radar, keeping the company out of ESG fund portfolios.
Of course, the best sources to use are those directly on the company’s website, although reports from other sites can be useful in some cases. For example, one site you might want to check out is Sustainalytics, which assigns most companies an ESG score.
Since the company is a third party, this can provide a more objective view of the company’s efforts so that you don’t rely solely on the company’s marketing and public relations language. If the company’s Sustainalytics report does not offer “ESG Report” for your search, you can also go directly to the site and enter the company name or symbol in the search field.
Analyze the information you find
Finally, you need to analyze the information you find. When you check company websites, you’ll probably quickly realize that some companies go deeper into their ESG efforts, while others make only brief mentions of their activities.
Additionally, companies tend to use flowery language and marketing language which can make it difficult to actually assess their business. You may need to do some level of reading between the lines so you can get a more objective view of their efforts before adding the company to your portfolio. Some companies might try to pass themselves off as more ESG-friendly than they actually are.
Reconfigure your portfolio for ESG
Environmental, social and governance issues have come to the fore for many investors when picking stocks. In fact, studies show that younger investors, in particular, have a preference for ESG-friendly companies.
With just a little time and effort, you can join the growing number of people targeting ESG-friendly stocks and use your stock portfolio to make a positive difference in the world.
Updated on February 22, 2022 at 3:56 p.m.
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