What Is ESG Investing (and Can I Invest in ESG Companies Using My IRA)?

ESG Investing Explained
ESG has become increasingly popular among institutional and retail investors alike. Here’s why it matters and how you can apply ESG principles to your investments.

For many would-be investors, it’s no longer enough that a business is profitable (or at least on its way to becoming profitable). Before investing, a growing number of investors want to see that a business is committed to making a positive impact socially, environmentally, or otherwise.

So in the spirit of Earth Day, we’re looking at what ESG investing is, why it matters, and how you can apply ESG principles to your own investments.

What Does ESG Stand For and How Does it Affect Corporate Responsibility?

ESG stands for “environmental, social, and governance,” and it reflects a fundamental shift in business and society. In the context of investing, it means weighing the short- and long-term impacts of a business through a variety of lenses historically viewed as “non-financial factors.” And the market is exploding. In 2021 alone, more than $120 billion poured into ESG investments—over two times more than in 2020.

That’s a big change from a few decades ago, when investors primarily looked at a company’s bottom line and growth projections with little regard for its social or environmental impact. At that time, a company routinely fined for polluting may have been considered business-savvy if paying said fines ultimately cost less than doing “the right thing,” which often occurred due to lax punishments. 

This isn’t unique to the United States, either. In the United Kingdom, courts have historically been seen as soft on environmental offenders. That’s changing, though. Courts are increasingly levying steep fines to hold commercial enterprises accountable. But fines only discourage environmentally destructive behaviors where laws prohibit such actions. As the Corporate Governance Institute reports, just 20 state- or corporate-owned companies are responsible for 35% of energy-related carbon dioxide and methane pollution worldwide.

Organizations like the Climate Accountability Institute are not only holding these corporations accountable, but also leveraging accountability to encourage corporations to use their resources to aid rather than oppose a transition to a more environmentally sustainable future.

Clearly, change needs a push sometimes. With increasing consumer pressure from Generation Z and Millennials who cite climate change and racial justice as top priorities, a call for change is something corporations can’t afford to ignore.

Mounting Consumer Pressure and the Rise of ESG Investing

More and more, consumers care if their mutual fund contains shares of a major producer of fossil fuels. Or, if a consumer brand whose products they buy has a poor record on hiring diverse candidates or buys ad time during a segment that runs counter to a brand’s core values. 

Corporations are increasingly expected to leverage their collective influence to support a wide range of causes, from tackling systemic racism to fighting climate change. They also know that when outrage turns to action—as in boycotts, protests, or social media campaigns—it can hurt their bottom line. 

It’s not just about public perception, either. It’s also about survival. Climate change has been deemed an existential threat by the U.S. Department of Defense under both the current and previous administration. Given projections on fossil fuel sustainability, investors want to know that the companies they’ve invested in have a plan to reduce their carbon footprint in line with established standards, such as those laid out during the 2016 Paris Climate Accords—and activist shareholders are taking them to task for it. 

They also want to know that their investments will remain profitable in 10, 20, or even 30 years. Likewise, businesses need to be able to adapt to a changing world or risk shutting their doors. Energy producers like Duke Energy are acutely aware of this reality. The North Carolina-based corporation has committed to exiting coal completely by 2035, with incremental goals preceding that lofty objective.

How to Apply ESG Principles to Your Own Investments

While companies adopting ESG principles is undoubtedly positive, it’s important to remain clear-eyed when evaluating potential investments. Especially with companies incentivized to adopt support for causes.

As Nasdaq chief economist, Phil Mackintosh, told CNBC: “What you want is so much money chasing those good factors that the corporates themselves want to project better factors and behave better.” 

With so much money pouring into the ESG space, it can be difficult for investors of any sophistication level to truly evaluate initiatives. Much of this is owed to the relative newness of ESG investing. Only recently have organizations like the International Sustainability Standards Board stepped up to establish global baseline reporting standards, though many of these historically “non-financial factors” remain difficult to measure.

For its part, the Securities and Exchange Commission is also getting involved. The organization responsible for protecting investors, maintaining markets, and facilitating capital formation believes investors need this information. So it’s proposed legislation requiring all companies registered with the SEC to regularly measure and report on associated climate risks.

Despite this, ESG is still relatively new. As a result, evaluating ESG investments will require significant due diligence on the part of the investor. Before investing in a company because you support its mission, find out all you can about its record with regard to environmental, social, and governance issues.

Can I Invest In ESG Companies Using My IRA?

If you’re interested in ESG investing, an Alto IRA is an easy and tax-savvy option. With a self-directed Alto IRA, you can use your retirement funds to invest in things you’re actually interested in. Like female- and minority-owned startups, sustainable farming practices, and eco-friendly real estate offerings. All with the same tax advantages of any traditional or Roth IRA.

Alto was created with a mission of enabling everyone to invest in opportunities that have largely only been available to wealthy and institutional investors. Alternative investments exist outside public stock exchanges and, in a portfolio alongside more traditional assets like stocks and bonds, can help you achieve a truly diversified investment portfolio and with the potential for outsized returns.

Through investment partner platforms like Blueaura (real estate), FarmTogether (farmland), and Portfolia (venture capital), you can invest in ESG opportunities. 

Check out our full list of investment partners to find more ways to use your retirement funds to invest in what matters to you—or open an account to get started.