ESG Investing 2.0

When I started as an advisor nearly 20 years ago, on occasion I’d receive the inquiry by a client “how can I invest in socially responsible companies?”. Fast forward two decades and nearly every initial client conversation we have, ESG investments are discussed. Though Socially Responsible Investing (SRI) has existed since the 1980s, the term, “ESG” was first coined in 2005 in a report which argued that integrating environmental, social and governance factors in capital markets was a positive step forward in growing sustainable markets.

Some clients have a desire to seek out firms with ESG offerings while for other clients the ESG concept may be a new one. In our experience, investors are interested in structuring portfolios in alignment with their values. And as investors have continued to seek out these types of investments, more fund companies have rolled out ESG offerings. With more offerings and competition in the marketplace, cost structure has come way down with ESG investing providing pricing parity on some ESG options versus “standard” portfolios, helping close the performance gap.

What exactly is ESG investing and where does it fit in the investment landscape?

  • Environmental criteria might measure a company’s conservation efforts, pollution, and water conservation.
  • Social factors may include worker health and safety, privacy and security, and community involvement.
  • Governance criteria may refer to shareholders’ rights, transparency, ethics, and fraud.

ESG is traditionally thought of as being a spectrum of investment decisions and integrations. Define your desired focus and values lens, and understand what market exposure is associated with the investment strategy. As an individual investor, one’s personal values system is applied. However if you’re investing as a couple you can utilize shared values where there’s overlap, develop a ranking system, or a mine-theirs-and ours approach. This can be fruitful conversation as you explore the options.

Can anyone invest in ESG? We construct ESG portfolios in three ways depending on the client need.

Preconfigured Single Strategy – Single ETF or diversified fund with specific ESG objective for those just starting out with smaller account balances.

Tilting Towards – Fully built out ETF or mutual fund strategy, including desired market tilts like size, value profitability, and momentum. A major emphasis within our tilted ESG portfolio is towards environmental sustainability. This strategy seeks to reduce exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves which have been found to be contributors to climate change.

Fully Customized – Individual stock strategy SMA (Separately Managed Account) where we work with clients to take a deeper dive on values and can build portfolios in alignment with those stated values. Multiple filtering criteria may be applied, with specific customization and ability to accentuate desired tilts such as Women’s Inclusion, or removal of particular companies like those with no racial or ethnic minority on their US company boards. This strategy is also a tax effective option for building around concentrated stock positions or taking low basis standard individual stock strategies and layering on ESG filters.

Whether you’re just starting out, mid-career, or in retirement, with innovations in technology and investment products, ESG solutions now combine the best of both worlds: A cost-effective, sound, and well-diversified ESG investment portfolio that captures market returns through ethical investing.

To learn more about ESG Investing, go online at privateocean.com/esg.

Private Ocean is a West Coast-based wealth management firm deliberately structured to give clients the intimate experience of a small firm while harnessing the power, depth and discipline of a much larger one. Formed in 2009, the firm has locations in San Rafael, San Francisco, and Seattle. 

Sabrina Lowell, CFP®, CPCC® is a financial advisor and Managing Partner for Private Ocean’s San Francisco location. Sabrina helps clients build the framework for making informed financial decisions during times of transition. She holds a Certified Financial Planner (CFP®) designation and received a BA in Business Administration from Principia College.

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