In recognition of the Earth Day this week, it’s important to acknowledge an investment process that is gaining acceptance and becoming more utilized by investors. I’m speaking of the growing interest in Environmental, Social and Governance (ESG) investing.
Investing has traditionally been associated with income generation or wealth accumulation, therefore putting your money to work, so you don’t have to. Historically, these endeavors focused solely on financial aspects. Will I get my money back? How much will an investment return? How long until the investment pays for itself? Will the company be profitable? In recent years, an investment discipline that considers non-financial qualities (such as, societal impact) has grown in popularity. The movement has been around for decades and attracted close to $12 Trillion1 according to the 2018 biennial report from The U.S. Sustainable Investment Forum. That’s a 3-fold increase from 20101!
The idea behind the ESG discipline is augmenting investment performance, not subjugating it. From an investment manager’s point of view, ESG criteria may be able to help identify investments with a competitive advantage poised for enhanced long-term performance. For the individual investor, ESG is a way to align a set of personal values with one’s investment dollars. ESG considers environmental impact, social effects and corporate governance. Each of these three main segments can be further subdivided. Social analysis, as opposed to financial analysis, can be conducted on these individual slices to determine a company’s ultimate ESG score. Social analysis offers a different analytical lens to complement traditional financial analysis for increased transparency.
At a high level, ESG is a way to align one’s social interests with one’s financial interests. The origin of ESG began decades ago focusing on companies that were good stewards to spaceship Earth. ESG has splintered into categories with a specific focus, such as green energy, and even alignment with faith-based criteria. Individual investors have a few implementation options. The first is the popular mutual fund structure, which has grown from a few niche players to some of the biggest mutual fund providers and tend to be actively managed. More recently, Exchange Traded Funds, or ETF, have entered the picture. ETFs employ a passive index approach to security selection.
ESG and the various permutations have gone from an investment niche to mainstream. ESG screening is increasingly employed by traditional investment managers looking to grasp an analytical advantage. Should ESG investing intertest you, please don’t hesitate to let us know. Have a great upcoming weekend.