What is ESG investing?
If you’re the type of investor who believes in putting your money where your mouth is, then ESG investing is probably right for you.
ESG – which stands for environmental, social and governance – investing takes value-based factors into account, not simply whether or not a stock or bond stands to make a lot of money. But ESG investors believe that not only don’t they have to sacrifice investment returns because of their values, but that those very ideals can enhance their investment returns.
ESG – which is also called sustainable and responsible investing, or SRI – is similar to socially responsible investing, but they’re not exactly the same thing. While many investors avoid putting their money into certain companies for moral or ethical reasons, such as those that make or sell tobacco, alcohol, guns or pornography, ESG investors believe their money should directly influence a company’s behavior and values, which will in turn lead to better financial – and therefore investment – performance.
Corporations that take ESG factors into consideration in how they operate lower their financial risk, attract the most talented employees, appeal to more customers and investors, and outperform their competitors. Not only is ESG not a niche investment strategy, but it’s growing fast.
According to US SIF, the Forum for Sustainable and Responsible Investment, total U.S.-domiciled assets under management using SRI strategies climbed to $12.0 trillion at the start of 2018, up 38% from $8.7 trillion at the start of 2016, according to its most recent biennial trends report. That represents more than a quarter of all U.S. assets under professional management.
According to RBC Global Asset Management, two-thirds of institutional investors it surveyed in 2017 said they “use ESG considerations as part of their investment approach.”
More recently, BlackRock, the world’s largest money manager with more than $7.43 trillion under management, announced in January 2020 that it will incorporate sustainable investment principles throughout the company.
“From BlackRock’s perspective, business-relevant sustainability issues can contribute to a company’s long-term financial performance and thus … enhance long-term risk adjusted returns,” the firm said. “By expanding access to data, insights and learning on material environmental, social, and governance (ESG) risks and opportunities in investment processes across our diverse platform, we become better overall investors.”
And State Street Global Advisors, one of the world’s largest index fund providers with more than $3 trillion under management, said it will start voting against the boards of large companies that lag behind on ESG standards. In 2019 it introduced a “responsibility factor” that measures how well companies do on various ESG metrics.
“Ultimately, we have a fiduciary responsibility to our clients to maximize the probability of attractive long-term returns — and will never hesitate to use our voice and vote to deliver better performance for them. This is why we are so focused on financially material ESG issues,” said Cyrus Taraporevala, the firm’s CEO.
This stamp-of-approval on ESG investing by two of the world’s largest and most influential investment companies should be taken seriously, but they’re not the only firms that have come to that conclusion. Actually, there has been a “growing body of research that suggests companies” that follow ESG principles “may in fact be helping their bottom line,” RBC said.
For example, a 2015 study by Oxford University and Arabesque Asset Management found “a remarkable correlation between diligent sustainability business practices and economic performance. Prudent sustainability practices have a positive influence on investment performance,” which “ultimately demonstrates that responsibility and profitability are not incompatible, but in fact wholly complementary.”
A 2015 study by Harvard University found that “a corporate sustainability strategy can be an effective way to manage risks, reduce environmental impacts, improve efficiencies, and lower costs. As evidenced by examples from a number of leading companies, a sustainability strategy can also pave the way for product innovation and new sources of significant revenue growth.”
If ESG investing sounds right for you, contact one of the Financial Advisors on our site for more information. Additionally, there are many mutual funds and exchange-traded funds that use ESG criteria.
About the Author: Jim Eckel, CFP is President of FinancialAdvisors.com – a marketing platform for indepedent investment and tax and accounting advisors in addition to weatlh technology companies who provide services and products to the independent advisor.