ESG Stock Investing

July 29, 2021

Before we dive into how BSW allocates client portfolios towards ESG/Values Aligned investments, we thought it would be helpful to expand on our last post, and provide more detail into what we see across the ESG spectrum. Navigating a landscape with so many different terms and no real standards makes it tricky to know what you own, why you own it and what impact (or not) your investment is making on the world.

Let’s start the conversation by talking specifically about ESG stock investing. ESG stock investing is a good jumping off point even though, here at BSW, ESG investing spans many asset classes.

ESG Stock Investing

Within traditional (non-ESG) stock investing, there are many lenses through which stock managers pick investments. No one way is the holy grail, rather, managers tend to emphasize what they feel are key company attributes; for instance – high earnings growth, low price to earnings ratio, low debt, high return on assets, increasing free cash flow.

The difference between traditional stock investing and ESG investing is that, in addition to traditional investing methodologies, ESG stock investing screens for and/or incorporates environmental, social and governance data into stock selection. Below, we’ve listed various ESG strategies in order of least impactful to most impactful.

  • Best in Class – These strategies typically hold stocks across all sectors (i.e., even oil, gas and utilities) and attempt to hold the stocks with the least amount of negative impact. Although the phrase has been overused lately, it could be called the “Cleanest Dirty Shirt” strategy.
  • Exclusionary – Just like the name implies, these strategies will not hold stocks involved with certain defined products or services but are free to hold all other types of stocks. Ex: Tobacco, Firearms, Oil
  • ESG Integration – Stock strategies that “consider” ESG issues within their research, but do not necessarily hold themselves out to be ESG funds. These managers are generally looking at ESG risks only and weighing these against the traditional financial metrics.
  • Sustainability Themed Investing – Involves the selection of stocks specifically related to sustainability in single or multi-themed funds. For example, managers that target companies in the renewable energy sector, companies that promote diversity, etc.

Now that we have compartmentalized these strategies, it will be easier to choose across the crowded stable of “ESG” stock mandates, correct? Unfortunately, no. You will not see a fund labeled, “Thematic” or “Best in Class.” An investor needs to dig deeper to understand what methodology or mix of methodologies the manager is using.

For instance, if you personally feel strongly about not holding any fossil fuel reserves, then Best in Class stock strategies are not for you. Likewise, if you are passionate about clean water, Exclusionary strategies might not cut it.

This is where an investment partner like BSW can help. We have done the work, dug into the nitty-gritty and cut through the myriad of ESG terminologies. BSW also has access to, what we believe are, the most seasoned, authentic managers across the ESG investing landscape.

All investors, no matter their background, passions, hobbies, philanthropic, volunteer, or charitable giving practices – care about something. Whether your something is ensuring our grandchildren have clean air and water, creating a more equal world, or empowering women and people of color as examples – BSW is proud to say that we can help you help your something.

And as my colleague, Lily Beitel-Horton mentioned in our previous post, making the world a better place while also achieving your financial goals is indeed, the cherry on top!