What is ESG Investing, anyway?
For many people, the idea of investing elicits negative images of greed embodied by the likes of Gordon Gekko and Bernie Madoff. That image is changing as investors such as Bill Gates and Tom Steyer utilize Socially Responsible Investing (SRI) to prove that successful investments do not have to be a zero sum game. No longer is investing merely picking stocks and bonds for the greatest financial returns, but also encompasses the practices and impact of the companies you are investing in. Your values can now be customized to ensure that each and every dollar you invest is aligned with your personal values.
Recently, new research and data sources have arisen to help investors determine how much good companies are doing and where corporate behavior can be improved. To describe this company information, new terms and acronyms have arisen including Corporate Social Responsibility (CSR), Impact Investing, or Environmental, Social and Governance (ESG). In particular, ESG is the most broad based and widely used acronym to refer to values based investing.
ESG investing has been part of American culture since the founding of our country. 18th century religious institutions were ESG trailblazers, prohibiting followers from investing in companies that promoted alcohol, tobacco, gambling, slavery, smuggling, and conspicuous consumption. Similarly, groups such as the Quakers prohibited investing in companies that generated revenues from slavery or war.
It took almost 150 years after the founding of the United States for “the first public offering of a screened investment fund”, the Pioneer Fund, to be launched by a Boston based ecclesiastical group. The fund excluded the “sin industries” of alcohol, tobacco, and gambling. The 1960s television brought the horrors of the Vietnam War to American living rooms, and protests put pressure on universities to divest from defense contractors.
In the 1980’s, ESG screening was used to pressure the South African government to end its policy of apartheid. By 1993, when the de Klerk government finally took steps to end apartheid, over $625 Billion of South Africa related investments had been screened out of investment portfolios. This “divest” model was widely regarded as a successful implementation of ESG and was repeated in 2006 in response to Sudanese genocide and human rights atrocities, when the US Congress passed the Sudan Accountability and Divestment Act of 2007, allowing state and local governments to divest from companies doing business in Sudan.
Pundits have argued that screening out controversial stocks comes at the detriment of investment returns, and until recently, this investing stigma has relegated ESG investing to a small group of investors. However, more recent research has shown that the majority of investors who have invested in ESG portfolios have actually shown slightly higher returns. Experts attribute this to lower risks involved with many companies who do run their businesses with a more stringent set of values.
With advances in data collection and reporting, several ESG data providers have emerged, and the ESG data industry has grown spectacularly. Research firms such as MSCI, Sustainalytics, Bloomberg, and Asset4 (now part of Thomson Reuters) are producing quantifiable data to measure and compare publicly traded companies on various ESG themes. Additionally, industry consortiums such as Sustainability Accounting Standards Board (SASB) and The Forum for Sustainable and Responsible Investing (US SIF) proactively work with companies and investors alike to standardize reporting metrics on ESG themes.
Global businesses have woken up to the opportunities of running their businesses in a sustainable and ethical way. According to a 2011 McKinsey survey (The Business of Sustainability), more than 58% of corporate business operations had completely or mostly integrated sustainability practices, and 57% of corporate strategic planning practices had completely or mostly integrated sustainability practices. Further, a 2013 report from Accenture (The CEO Study on Sustainability) found that 78% of Global CEOs saw sustainability as an opportunity for growth an innovation and 80% of global CEOs indicate that they consider sustainability as a strong competitive advantage in their business operations. By running their businesses in a sustainable manner, global CEOs can improve the reputation of their businesses, take advantage of new markets and new growth opportunities, and gain enhanced access to ESG minded investors.
While there is a wealth of available ESG data on a multitude of sustainability topics, some investors have found it difficult to create a portfolio that fully matches their values. While multiple fund providers have launched new ESG focused mutual funds and ETFs, many investors balk at the funds after reviewing the fund holdings, pointing out that the funds are not trulycustomized as one or more companies do not fit with the investor’s values.
To solve the customization problem, investors may consider a separately managed account (SMA) where portfolios are managed for each individual client. While traditionally these accounts have been limited only to high net worth clients, Just Invest is creating such bespoke portfolios that allow each individual to specify the ESG criteria of their investment and restrict specific companies in their portfolios.
We empower individuals to control where each and every investment dollar will be working through our personalized portfolios. No more compromises. You can do good and expect high returns. Zero sum is a concept of the past.
Until next time, invest with intention.
About Just Invest
Just Invest is a Registered Investment Advisor and technology firm delivering personalized solutions to individuals, families and mission driven organizations. Just Invest specializes in combining advanced technology and quantitative finance to deliver transparent, rules-based and risk-managed portfolio management. The result are tailored portfolios of stocks and bonds that empower investors to invest with intention.
Interested in learning more? Check us out at www.justinvest.com