ESG investing is one of the more talked about ways to invest today. But what exactly is ESG Investing? How is it different from the traditional investment options? Is it as profitable as other investments? How do I find ESG investments?
In today's post, we will attempt to answer many of these questions and show you ways to get started in ESG investing.
ESG Investing Defined
ESG is an abbreviation that stands for Environmental, Social, and Governance. ESG investing involves evaluating companies' businesses based on these three characteristics. Things can get a bit confusing when doing this evaluation.
The criteria are different for each company and each investor. Let's take a look at some of the things on the list for each category.
Environmental factors might include things like how the company handles its waste, its energy use, chemical use, and disposal, and the impact their practices have on the environment.
Are they focused on caring for the land, water, and neighborhood around their businesses? Have they been cited or fined for violating rules around any of these areas?
Social issues might include things such as how the company treats its employees. Do they offer competitive salaries and hourly wages? Do they provide health care and other benefits to help their employees and families?
Do they work with vendors who hold to the same high standards? How are their relationships with state and local governments? Do they give back to the communities where they operate?
Do they have an open and transparent accounting system? Do they disclose any and all grievances, either from employees or outside agencies? Have they appropriately resolved those issues? Do they operate ethically?
If a public company, do their shareholders have voting rights? If run by a board of directors, who are they? Are they independent and have diversity? How are the executives compensated? How wide is the executive pay gap to the average employee?
Though not an exhaustive list, these are some of the many ways to evaluate a business.
ESG Investing – Mutual Funds and ETFs
The easiest way to start your ESG investing is in mutual funds and ETFs (exchange-traded funds). Funds can either be passive or actively managed funds. Passive funds will mirror a particular index and buy all of the stocks in that index (think S & P 500).
Actively managed funds have a fund manager or management team the analyzes individual companies and industries to find what they feel are the best companies to buy and the best time to buy them.
You can find mutual funds and ETFs that do both.
When it comes to ESG, passive funds would match a particular ESG index and invest in all the stocks in that index. There are over 1,000 ESG indexes. Here's a sample of some of the ESG indexes from MSCI.
Actively managed funds would do the same stock picking within many of the ESG indexes to find the best companies to invest in and the best time to invest.
I'll leave it to the individual investor to find what suits their investment style the best. Whichever style you choose, it will be easier to find a more diversified portfolio when investing in mutual funds or ETFs.
ESG Investing Startups
If you're looking for a more aggressive investment option in ESG Investing, consider looking for startup companies whose stated goal is in one or more of the ESG areas.
Let me say at the outset that investing in startups is one of the riskiest ways to get involved in ESG. Remember, risk and return are related. The greater the expected return of an investment, the greater its risk. My advice when doing this kind of investing is only to invest what you're willing to lose.
With that said, there are ways to invest in ESG startups that may make sense.
Crowdfunding has entered the investment arena in a big way over the past few years. You see it most often in the real estate market. Newer funds entering the market use crowdfunding to attract all kinds of investors. These newer funds register with the SEC as exempt funds, usually under the SEC's Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding, allows smaller investors into an investment space that hasn't been available to them in the past.
ESG Investing and Crowdfunding
Crowdfunding is also available for startups. You have likely heard of many of these crowdfunding companies. Kickstarter, GoFundMe, Indiegogo, Patreon, and Fundable are among the more recognized crowdfunding sites.
When looking into crowdfunding for ESG companies, we came across an exciting company – IX Water, who is raising money to expand its operations. Investors can be a part of this investment opportunity for as little as $250.
First, let me tell you about IX Water.
Who is IX Water?
Located in Golden, CO (where Coors beer gets made), IX Power Clean Water (IX Water) is an IX Power, LLC company. The company is a spin-off of the internationally famous Los Alamos National Laboratory in New Mexico.
IX Water has tapped into the oil and gas industry in a very unique way. In addition to producing oil and gas in large quantities, the industry also produces hundreds of thousands of gallons of water when extracting oil and gas. Unfortunately, the water that comes from this process is highly contaminated with toxic pollutants like heavy metals, hydrocarbons, and sulfur compounds. Without treatment, this water is useless.
According to their IX Water, two to fifty gallons of water are produced for every barrel of oil and two gallons for each MMTU of gas. Most of the water is left to evaporate in ponds or trucked away and put into disposal wells. These disposal methods are not reliable and prone to other problems.
IX Water's Solution
To solve this problem, IX Water developed a system to treat and recycle this contaminated water at a cost that is 50% lower than other methods. They developed this technology in cooperation with the Los Alamos lab, The University of Texas, and New Mexico Tech Science Engineering Research University.
They have patented the system they use to clean up this contaminated wastewater. Their patented system removes 99.81% of contaminants fro the wastewater. That meets or exceeds the U.S. EPA, the European Union, and Chinese regulation standards.
How To Invest in IX Water
Investing in IX Water is done through the crowdfunding company, starttngine.com. Start Engine helps companies raise money for their growing businesses. Crowdfunding allows smaller investors to participate in opportunities that are usually only available to accredited investors.
As previously mentioned, investors can start with as little as $250.
They offer multiple levels with bonuses for each level of investment (starting at the $1,000 level). The investment levels are $250+, $500+, $1,000+, $2,500+, $5,000+. $10,000+, and $25,000+. The bonuses come in the form of additional shares for each level. Get the details of the offering here.
Shares are $1.25 each with a maximum amount raised of $1.07 million. As of this writing, IX Water has raised $336,400 from 574 investors. The company is currently valued at $13.1 million.
IX Water's lofty goal is to “become the default choice for produced water treatment of companies within the gas and oil extraction industry.” In reality, every company wants to become the leader in its industry. IX Water appears to be well-positioned to make some noise in the industry.
Risks of an IX Water Investment
Like with any investment, there are risks involved. Investing in startups is among the riskiest investments. If the company fails, investors will lose all of their money. If the company falls short of its goals, the expected return on investment would be much less than it might be.
As I've already mentioned, investors should only invest what they are willing to lose into any startup company, IX Water, or otherwise.
ESG investing is as popular as ever. A good argument can be made that we have not been good stewards of the resources of our planet. That includes things like air and water quality, treatment of people, toxic waste, and many other things.
Companies that build sustainable businesses that improve their communities and the environment are in high demand.
Water is becoming more and more scarce. Clean water is absent from many parts of the world. We like that IX Water is doing something about the problem. Here at Your Money Geek, we want to support companies that are doing their best to make things better.
Crowdfunding allows investors to support these kinds of companies with a small amount of money. We think they are worthy of consideration.