ESG investing can be defined as the consideration of environmental, social and corporate governance factors when making investment decisions in both the public and private markets.
In other words, we can think of this as ‘Full Information Investing’. Not only are we accounting for financial data, but we are also evaluating the nonfinancial data. 50+ years ago, the first iteration of ESG was Socially Responsible Investing, which was largely exclusionary in nature, for example divesting investments from firearms or alcohol. Today, companies are disclosing more and more relevant environmental and social practices which has allowed Socially Responsible Investing to evolve into ESG investing. The distinction being that ESG is both exclusionary AND inclusionary. Including more information allows us to uncover relevant ESG risks and take advantage of potential opportunities -ultimately leading to more informed investment decisions.
Let’s look at the Wells Fargo scandal as an example. Wells Fargo’s sales force was internally pressured to create fraudulent bank accounts, which caused damage to numerous stakeholders – consumers, employees, and investors to name a few. In the end, Wells Fargo paid out over $2.7 billion in fines. Perhaps, if one had looked at Wells Fargo through a social and governance lens prior to the scandal, one may have discovered a lack of checks and balances in place and a culture that incentivized the wrong actions. All data points that could have signaled that an investment in Wells Fargo posed a greater relative risk.
Why ESG may feel unnecessarily complicated…
An ongoing issue for investors and investment professionals is the lack of standardization across the ESG investment world. It can be confusing – from multiple definitions for the same terminology, to each ESG managers using a different screening, or investment methodology. That is why our first suggestion is to understand how ESG is being defined.
When BSW does its due diligence on an ESG manager, we take the time to understand how a manager is screening /excluding securities, including/optimizing securities, managing and implementing their strategy. For instance, one fund may rely solely on Sustainalytics (one of many ESG ranking services) to determine their stock portfolio; whereas another fund may have its own sustainability team that takes an in-depth, company specific approach. We want to dig into the specifics and discover if the fund company itself buys into the ESG strategy; we will ask questions such as, is this a purely exclusionary approach? At the end of the day, just because a fund has ESG/Sustainable/SRI/Impact or some other ESG moniker on its label, it doesn’t mean that it aligns with your values; nor does it mean that it avoids companies that you find objectionable.
As ESG investing continues to gain traction, we’ve seen the emergence of a variety of different ESG flavors, and it is challenging to differentiate. By partnering with BSW, you skip the jargon and end up with a clear explanation of what you own, why you own it and how what you own aligns with your values. As a firm, we use the term “Values Aligned Investing”, an umbrella term, to capture the various ways in which you can align your investment dollars with your values. Values Aligned Investment Solutions can run the gamut from simple exclusionary screens all the way to investing in private, local Impact investments.
Is ESG Investing a Trend?
ESG is not a niche form of investing, it is mainstream. Large investment companies like BlackRock and pension funds are recognizing, if nothing else, the risk mitigation component of ESG investing. As of 2019 The USSIF reported that $17.1 trillion in US assets under management are using an ESG strategy. Another way of looking at this is $1 out of every $3 investment dollars is directed towards ESG investments today.
There’s no catch, in fact, there is a cherry on top!
We know you are probably wondering – do I sacrifice returns if I invest in ESG strategies? BSW believes, over longer periods of time, ESG investments, at the very least, should match the returns of traditional investments. Importantly, by investing in ESG assets, these returns should come with less inherent, underlying risks. The US SIF (the leading ESG forum with membership representing over $5 trillion in assets) states that investors do not have to sacrifice returns to align their investments with their values. It cites numerous studies undertaken by leading institutional firms, showing a neutral to positive performance delta over longer periods between ESG strategies and their traditional counterparts.
Now, for the cherry on top – in addition to investment returns, you are also aligning your values with your investments and affecting positive change!
Stay tuned for our next post in our ESG Series where we will outline how we, at BSW, implement customized Values Aligned Investment Strategies for our clients.