Environmental, social, and governance (ESG) investing has seen significant attention and growth. According to Morningstar, the money invested in ESG has more than doubled in the past year.1 Is ESG investing just a fad or can it be worth exploring deeper? A recent report from Blackrock estimates that global sustainable fund assets will grow from $220 billion in 2019 to $1.2 trillion in 2029.2 Is it possible to gain good investment returns and support companies that are striving to make the world a better place? In this article, we will provide an overview of ESG and delve into the investing considerations.
What is ESG Investing?
ESG Investing entails factoring in environmental, social, and governance impact when evaluating companies for inclusion into an investment portfolio:
How does the company impact the planet? Potential topics could include resource conservation, pollution reduction, recycling, green products, climate change, and renewable energy.
How does the company impact people? The people could be internal (company culture) or overall society. Potential topics could include diversity and inclusion, company values and mission, human rights, staff engagement and support, compensation/perks, work conditions, and local community engagement.
How does management, leadership, and the board govern the company? Potential topics could include board composition, executive compensation, transparency with shareholders, equity structure, and relationships with regulatory bodies like the SEC.
Are ESG and SRI related? Perhaps they are cousins?
ESG focuses on sustainability and evolved from what was originally terms Socially Responsible Investing (SRI) ESG and SRI are not the same thing. While ESG is assessing specific factors of environment, social, and governance impact, SRI typically involves removing or screening out certain investments based on specific ethical/ value guidelines. Sustainability, or ESG, investing includes companies with certain positive attributes and not just avoiding certain companies or industries.
What are common myths?
Investing in ESG funds are way too costly.
ESG fund fees are decreasing as many lower cost and index-based funds are being offered.
There are very limited choices.
More than half of all ESG funds and ETFs have been launched since 2017.3 The choices have increased.
ESG only removes companies (aka negative screening).
ESG research promotes including companies with positive attributes, not just eliminating those based on negative criteria.
This is merely a niche strategy.
Broad index funds are available, as are niche sector funds. Further, many companies are including ESG metrics into their corporate reports.
What are the pros and cons to consider?
There are many mutual funds and ETFs to choose from.
More sophisticated and less restrictive approach than traditional responsible investing.
Funds can be highly diversified.
There remains confusion about what qualifies as an ESG asset.
Name of fund can be misleading and not indicative of underlying holdings. Look under the hood!
It can be difficult to measure the material impact of ESG investments.
The number of sustainable investment funds in the US has increased 92% from 2015-2020 and this trend4 is expected to continue. At Modera, we continue to believe in globally diversified portfolios, low-cost portfolio implementation, and minimizing your overall tax liabilities. We base your investment recommendation on your individual goals, your time horizon, and your risk tolerance. ESG may or not may be appropriate with your objectives. If you have any questions about how Modera could incorporate ESG investments into your portfolio, please reach out to your Modera team to have a conversation.
2 BlackRock projection from IShares Sustainable ETFs Overview Q4 2020 Presentation.
4 Source: BlackRock IShares Sustainable ETFs Overview Q4 2020 Presentation.
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