ESG stocks are those where the companies concerned have a strong focus on their environmental impact, social actions and appropriate governance. These are quite broad categories, but represent areas that growing numbers of investors want to include in their portfolios. In the past it was all about profits, but times are changing. So if I wanted to build a portfolio in this area, here’s how I’d go about it.
Diversification within ESG stocks
There’s no set type of company that makes a likely ESG candidate. However, some sectors find it easier to publicly show ESG-friendly values. For example, firms within the utility sector can make a clear push towards renewable energy and net zero emissions as a goal. There are several businesses in this area that are ESG-focused, in my opinion.
On the other hand, some companies in other sectors might struggle to have strong ESG links, even with good intentions. Plenty of retailers could struggle to source products that are suitably ‘ethical’. IT and software companies might have limited environmental impact anyway, so would find it difficult to position themselves as having a big commitment to ESG issues.
Nonetheless, I need to be careful that my ESG stocks portfolio is diversified as I build it up via monthly investments. Being overly concentrated in just a few stocks or a few sectors can leave me exposed if any area starts to underperform. As long as I’m aware of this, I can consciously pick stocks from different areas, although I may have to do quite a lot of research.
Investing regularly over time
Investing on a monthly basis with, say, £500 would help me in several ways. It would allow me to average my the price I pay for a particular stock over time. This blended rate would allow me to take the stress out of trying to pick the perfect time to invest all in one go. For ESG stocks, it would also give me another benefit.
ESG investing is a trend that’s been getting more popular in recent times. I think this trend will continue. Therefore, companies are likely going to need to adapt and become more conscious of their actions in this area. So the top ESG stocks will likely change in the future. By investing each month, I would be able to take advantage of this. I could pick and choose the best stocks at any given time, depending on what’s going on in the market.
Ten years down the line, I should be able to have a solid portfolio of stocks that tick the ESG box but that have also hopefully generated me good compounded profits over the years.
Ultimately, demand for ESG-friendly stocks should increase in the future, so thinking about starting a portfolio now appeals to me.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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