The complete guide to buying and selling ESG company stocks

Whether they are focused on climate change, gender equality or animal welfare, sustainability-focused stocks are often called ‘ESG’ companies. Discover what ESG investing is, and how you can speculate on the companies’ futures.

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What is ESG investing?

ESG investing stands for Environmental, Social and Governance investing. It refers to a class of stocks and other financial assets that are focused on sustainability. These investments not only aim to generate positive returns but a positive impact on the environment and society.

ESG investing has become a means of evaluating corporate behaviour within a company – attitudes toward gender and ethnic diversity – as well as the effect the company has on its wider environment – such as its carbon footprint.

What are ESG factors?

ESG factors are the criteria a firm would have to meet to be considered a sustainable company. Obviously, each investor or trader’s stance on what is considered ethical will vary but ESG factors act as an overarching set of rule guidelines for companies to follow.

There’s no hard and fast list of these criteria yet, but various bodies – such as the Sustainability Accounting Standards Board (SASB) – are working toward a standard across industries.

Currently, factors we know contribute to ESG investments include:

  • Climate change and carbon emissions
  • Air and water pollution
  • Deforestation
  • Energy efficiency
  • Waste management
  • Customer satisfaction
  • Gender and diversity
  • Employee Engagement
  • Human rights
  • Labour standards
  • Anti-bribery and corruption
  • Political contributions
  • Whistleblower schemes

The main issue facing the ESG investing trend is ‘greenwashing’ – the tendency for brands to pretend their products and services are more compliant to ESG criteria than they actually are. Currently, there is no real measurement of ESG standards; it’s impossible to reliably enforce compliance.

It’s also important to screen your stocks by industry, as it is possible for morally-dubious companies to score highly in ESG criteria. For example, a defence stock that produces weapons might score well in terms of diversity and inclusion, or waste management, but might not be an industry you want to invest in if you were anti-gun use.

Why is ESG investing a trend?

ESG investing is becoming a trend as the growing demand for change toward a more equal, eco-friendly and equitable society is taking centre stage.

These criteria are particularly important to the younger generations who often want to know that their investments aren’t going against their ethical views. Although it might seem a lot of these drastic changes are out of our control, by making more sustainable choices when it comes to the stocks we focus on, we can have a huge impact on the future of the planet, animals and our fellow humans.

In the last ten years alone, the trend toward sustainable investing has meant companies have to declare where their money goes, and what they’re going to use it for. Boards are constantly being held to account for their decisions regarding diversity and inclusion, and what measures they’re taking to reduce their companies’ carbon footprints. These changes didn’t happen overnight; they’re the result of individuals demanding change.

For example, NASDAQ is contemplating introducing rules that would require all listed companies to disclose their diversity commitments – particularly on their board of directors – as part of social standards. This was brought to the forefront by the Black Lives Matter movement, especially after the protests that erupted globally in 2020.

Companies are being forced to adopt the principles of ESG if they want to attract capital from younger generations and the more ethically-minded investors. A study by the Chartered Financial Analyst (CFA) Institute showed that in 2020, 85% of its members considered ESG and that 65% of its clients demanded that they do so.1

Why should I care about ESG investing?

Even if you’re not an investor, and you don’t necessarily worry about the knock-on effects of your positions, ESG investing is still a trend worth taking note of as it will impact the profitability of companies over the long term.

Plus, as ESG issues begin to be felt across the world – for example, climate change is causing flooding, demographic shifts and new government regulations – the impact will be felt in companies’ supply chains and production output.

Stakeholders, investors and traders are all putting pressure on companies to conform to ESG requirements. Companies that don’t make an effort to be more sustainable will likely not hold up in the longer term. So, by combining an ESG-focused criteria with normal stock analysis, you could identify companies that are likely to succeed as society progresses.

It’s unlikely that any company will be completely unaffected by the move toward ESG investing. This means that identifying ESG stocks will give you a chance to go long and short as the trend progresses – finding companies that will benefit from the sustainable drive and those that will fail because of it.

What are the types of ethical investments?

  1. Company stocks. The most common ethical investment is just selecting a company you believe in and taking a position on its shares (if it's publicly traded). Companies such as Microsoft, Prologis, and NextEra Energy consistently rank on a lot of ESG rating lists. However, alternative energies like First Solar and Orsted, and eco-food firms such as Beyond Meat and United Natural Foods, are also attracting ethical investment flows
  2. Stock indices. There are a several stock indices that track the performance of the shares of a number of sustainability-focused companies – such as the Global Sustainability Index, Dow Jones STOXX Sustainability Index and the ESG Index
  3. Investment funds. According to research by Bloomberg, funds that bet on companies that perform well under ESG factors are one of the fastest-growing asset classes in the US. More than 140 ESG-focused funds were launched in 2020 alone, making up to $12 trillion worth of assets under management

How to buy and sell ESG company stocks, indices and ETFs

When you trade with City Index, you can take a position on ESG companies, indices and ETFs using spread bets and CFDs. You won’t take ownership of the underlying asset, which means you can take advantage of markets that are rising and falling in value.

Find your first opportunity using these easy steps:

  1. Open a City Index account, or log in if you’re already a customer
  2. Search for the company, index or ETF you want to trade
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade

1Chartered Financial Analyst (CFA) Institute, 2020 


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