Environmental and Social Governance (ESG) Investing is the concept of aligning an investor’s portfolio with his or her personal beliefs and values about sustainability, the environment, and the role companies play in the communities they operate.
Joshua P. Preiss, CFA®
Apr. 30th, 2018
In recent years, investors have become increasingly conscious of what they hold in their portfolio, and if their investment portfolios align with their personal values and beliefs. In fact, according to Blackrock, the market for mutual funds investing in sustainable companies grew 135% between 2012 and 2016. Some investors have become concerned with the impact the companies held in their portfolios have on the environment, as well as the impact these companies have on society as a whole. This article will seek to explain what Environmental and Social Governance investing is, as well how investors may incorporate ESG investing into their portfolios.
Environmental and Social Governance, or ESG, is investing in companies which fit a certain investment mandate and comply with a set of ethical principles. Typically, ESG mandates fall under one of three categories: exclusionary investing, factor investing, and impact investing.
Exclusionary investing is deciding to exclude companies which provide certain products and services, such as excluding oil companies from a portfolio due to their potential impact on the environment.
Factor investing is investing in companies which rank highly in ESG performance standards, such as investing in award-winning companies for their treatment of employees and the communities they operate in.
Impact investing is purchasing companies whose products and services are used to better society or the environment, such as investing in a solar company or a company which consults others in reducing their waste created in manufacturing and packaging their goods.
ESG in Portfolios
There are a couple of ways for investors to incorporate ESG into their portfolios.
First, investors may invest directly in companies known for their positive impact on the environment and their treatment of employees. This information may be found on company websites and press releases, which will typically have sections dedicated to how the company implements sustainable business practices and any awards or certifications the company has earned to recognize its progress in ESG.
Second investors may invest directly in funds with investment mandates to only invests in sustainable companies, for example, a company called Parnassus Investments specializes in investing solely in companies which meet a predetermined set of ESG standards.
Some fund companies issue exclusionary funds, including issuing low carbon ETFs with mandates to reduce the carbon footprint of the companies it invests in. information on ESG mandates can be found on fund family websites, offering documents and prospectuses.
Morningstar includes information on whether a fund has an ESG mandate, as well as a ranking system which judges funds based on the sustainability of the companies held within it.
Please contact our office if you have any questions regarding this topic.
All investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. ESG investing strategies do not assure profit or protect against loss.
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