ESG Investing. Having your personal values align with your investment strategy.
by Doyle Ranstrom on Aug 2, 2021
Is it possible to invest in a manner that aligns with your social values? I believe so and it is called ESG investing. ESG stands for Environmental, Social, and Governance.
- Environmental criteria consider how a company address environmental concerns such as climate change and sustainability
- Social criteria assess how companies treat their employees, suppliers, customers, and the communities in which they do business.
- Governance relates to a company’s transparency, leadership, executive pay, audits, internal controls, and shareholder rights.
Though ESG investing has been around for years in one form or another, it has had rapid growth in recent years. I would suggest ESG investing breaks down into two broad categories.
- ETF's [exchanged traded funds] which track a specific index or asset class. The difference is ESG ETFs [say that five times fast] apply screens that eliminate companies that do not meet the screens. Screens can be simple such as eliminating companies that leave any type of carbon footprint. They can also be complex containing screens that address all three ESG areas. ESG ETFs generally have very low fees, generally similar to other ETFs which track the same index or asset class.
- Managed ESG Funds are which are professionally managed. As one would expect, the internal fees are higher than with ETF ESG Funds. However, with some of these funds, the screens are much more intense and specific.
One example of ESG ETFs is iShares through Blackrock Inc. For a broad perspective on iShares ESG options and screens per fund, I would suggesting checking out the Sustainable Investing section of their website. It is important to note, that Blackrock has been a leader in addressing sustainable investment and how climate change may affect the markets.
An example of managed ESG funds is Parnassus Funds. Parnassus uses in depth investment process, which is discussed in detail on their website, that leads to a limited number of holdings in their various equity funds. If you visit their website, check out their ESG Profiles section. Once they own a stock, as a significant stock holder, they are advocates for ESG issues with corporate management.
It is important to note that I am neither recommending or not recommending either iShares ETFs or Parnassas Funds. I am suggesting both websites are good sources of information on ESG investing.
One of the discussions regarding ESG investing is "are investors giving up return to invest their values"? I would suggest investors first can answer this for themselves by comparing returns of various ESG options to the indexes the are tracking. It is also important to note that many ESG managers and investors believe after applying the screens, the remaining companies have the potential to be more profitable going forward, especially on a long-term basis
Personally, and no guarantee for the future, I have always felt long-term return is driven by asset allocation.
My consulting firm is a fee-only firm billing hourly. I do not manage money in any format, but as an option for hourly clients, I have put together hypothetical ESG asset allocation models which are a tool in assessting risk and reward potential going forward. Again, not past performance does not predict future results. At the same time, many investors wish to use tools to make decisions and these models can be helpful.
If any reader should have questions or thoughts on ESG investing, feel free to contact me.