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ESG: Environmental, Social and Governance Investing

Nuclear and Solar PowerIt’s a good idea to be conscious of the environment and value social responsibility. Your portfolio can be invested in companies that pledge to follow certain practices that fulfill these requirements. This is called “ESG investing” (Environmental, Social, and Governance Investing)

Here’s a breakdown of the ESG factors:

  1. Environmentally Aware: the company is conscious about waste, energy use, and the use of other natural resources
  2. Socially Responsible: Companies that support communities in which they operate through volunteering or donations, fair wages and working conditions, etc.
  3. Follow Governance: Companies that adhere to rules and practices that ensure accountability, fairness, and transparency, and avoid conflicts of interest

How to get started in ESG investing

Are you interested in ESG investing? Figuring out which criteria you want to follow — and how you will determine if that criteria is met by the companies in question — requires a great deal of work! You might start by selecting certain mutual funds or ETFs (exchange traded funds). These investment vehicles place the job of collecting and analyzing data in the hands of the fund’s managers. Plus, there are a significant number of funds that promote ESG investing. Each applies its own standards and marketing material. The marketing material will often include pictures of green trees, windmills, blue water and recycling symbols — that sort of thing — along with “feel-good” slogans to boot. The important stuff, however, is in the prospectus.

Laptop and Research NotesIs ESG investing better for my portfolio?

Keep in mind that this type of investing is still evolving. Is there evidence that, as an investor, your returns will be better with ESG investing? There are many studies with fancy charts and graphs on this subject. After plowing through hours of this stuff, my answer to the question is: I don’t know. Much of what I read had little consistency. Most of the material I reviewed seemed to start with a conclusion, which was then backed with material to support that conclusion — but left out factors that were important to me as a financial advisor and investor.

ESG information is not mandatory for companies

Currently, the SEC (Securities & Exchange Commission) does not have a mandatory requirement that companies provide ESG information. Determination of what the criteria would be and how that information would be analyzed creates challenges.

So, while a company may have great social policies, for example — they may not be environmentally friendly. Even these components of an ESG evaluation may be very subjective, somewhat like when products claim to have “50% less sugar.” 50% less of what, exactly?

Additionally, companies that you may consider a good investment and are good community partners — even those which have shown transparency and accountability — can suddenly find themselves on the “naughty list.” Headlines and sound bites sometimes damage a company’s reputation overnight, even before a fair assessment is made. “Blame and shame” moral rhetoric applies to corporations just as it does to individuals. You’ll need to know how to react when this occurs. Also, if you’re using a fund, how will the manager react? Will they buckle to outside pressure, or take advantage of a possible opportunity? Is this really as big of a deal as it sounds?

Working with ClientsESG investing can be complicated — an advisor can help

Like any investment option, there’s a lot to consider in ESG investing. It’s as important to me as it is to you that the investments you select match what’s important to you as an investor and as an individual. If you want to discuss this in greater detail, feel free to contact me!

August 2019

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

The return may be lower than if the adviser made decisions based solely on investment considerations.

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