ESG is a relatively recent innovation in the world of ethical investing, and we think there is much to like about it. While investors previously had to choose between financial performance and personal values, ESG is now able to combine the best of both worlds by providing market-like returns while also reflecting the investor’s personal values. Briefly explained, ESG refers to the three main factors used in measuring the sustainability and ethical impact of investing in a company. ESG stands for ‘Environmental’, ‘Social’ and ‘Governance’, and each of these three areas incorporates a wide variety of metrics used in addressing sustainability and ethical concerns.
Investment strategies that take an ESG approach purposely invest more in stocks of companies that score well on ESG measures, and allocates less to those that score poorly. Moreover, companies that are the worst offenders on one or several metrics are typically excluded from the portfolio altogether.
What is Measured?
Environmental, Social and Governance represent the three major categories that ESG strategies focus on, and there are more than one thousand metrics covering several dozen key underlying ESG issues. Under the Environmental umbrella, such key issues include carbon emission (a key metric on climate change), water quality, biodiversity and toxic waste, to name a few. Some of the issues under the Social umbrella are labor rights, health & safety, privacy & data security, and anything from tobacco to the production of cluster bombs. The last category, Governance, addresses issues related to shareholder rights, transparency, business ethics, leadership diversity and corruption. In sum, these three factors cover a wide range of ethical issues that are important to many investors.
While investing in ethical companies is not a new phenomenon, improvements in technology, better access to data and a general increase in investor demand all contributed to the development of ESG investing. This field was previously referred to as Socially Responsible Investing (SRI), and the terms are still used interchangeably by many. While SRI was generally characterized by more concentrated and expensive portfolios through its focus on company exclusions and screens, today’s ESG approach seeks to capture the risk and return of the stock market, by investing in companies that take more ethical approaches to various aspects of E, S, and G.
So is this just the latest marketing buzz from Wall Street? Admittedly, the financial industry has a tendency to mystify the field with buzzwords, acronyms, and three- or four-letter abbreviations. Often this is part of a marketing strategy that seeks to wrap variations of old concepts or products into shiny new tools that sell well. However, in contrast to many past offerings, we believe ESG is a valuable contribution to the investment world and the type of investment focus many investors may want to incorporate into their portfolios. As with any investment strategy, it is important to fully understand how the strategy operates and, most importantly, to be certain that the strategy aligns with what the investor wants.
The Best of Both Worlds
The investment solutions offered in the ESG category have been evolving for a while, and we have seen particularly rapid changes the past couple of years. We take our role as fiduciaries very seriously, so while we want to offer our clients investment solutions with a strong ESG profile, it is also important that this is not done at the expense of a less solid investment portfolio. Thanks to innovations in technology and investment products, we are excited to now launch our ESG solutions that combine the best of both worlds: A cost-effective, sound and well-diversified ESG investment portfolio that captures market returns through ethical investing.