The past few years have focused a spotlight on an investing approach that digs deeper into investors’ priorities than just financial return. Many investors are now asking how they might use their financial portfolios to participate in issues such as climate change, social unrest, and diversity/inclusion. One answer is “ESG Investing.”
Environmental, Social, and Governance Investing, or ESG Investing, has become a tool that allows investors to invest their portfolios while staying in alignment with their most deeply held principles and values. This investing approach considers factors such as each company’s environmental footprint, brand reputation, participation in social causes, and inclusive corporate governance. With this information, investors can more carefully choose which corporations to include in their financial portfolio.
Of course, a company’s financial performance will always be a key factor for investors who are doing their due diligence. It’s important to know that ESG-related factors can also impact a company’s long-term outcomes. Most public corporations now understand the importance of sustainable investing and are shifting their behaviors to become better all-around corporate citizens.
As a result, investors who also care about ESG issues may benefit—both financially and in terms of their values—from these broader measurement tools.
What do E, S and G represent?
E = Environmental
This category considers the impact companies have on their surrounding, natural environment. Does the company track their water usage, carbon footprint, and use of clean technology? These factors can help quantify the company’s environmental impact and positive trends in these categories may lead to beneficial outcomes.
For example, product packaging has been an area where waste has been increasing, especially with the rise of e-commerce. Companies like Dell have disclosed using recyclable packaging made of bamboo and has one of the highest recycling rates in the software sector. Actions such as these not only help the environment but also channel capital to the most sustainable companies, rewarding both the investor and the environmentally friendly corporation.
S = Social
This category includes a company’s impact on the social good and positive social change. A corporation’s involvement in and stances on issues such as human rights, diversity, employee health and safety, and community engagement may be considered.
A company with a positive social impact “rating” may see an increase in trust among employees and shareholders. These factors may improve the company’s stability and boost its share prices in the long run.
G = Governance
Governance issues refer to how well and diversely a company is managed. The positive governance category could include management quality and education, equitable executive compensation and diversity, as well as corporate transparency regarding its disclosures.
If you follow the news, Volkswagen Group provides an example of poor governance. In 2015, it was revealed that the company had programmed 11 million diesel vehicles to cheat emissions tests. They suffered billions in penalties and a sharp blow to their reputation. Could this have been avoided with an ethical management team?
Companies that prove they have quality leadership teams and are constantly improving their governance methods would earn a positive rating on the “G” portion of an ESG scale.
Do I have to sacrifice anything to be an ESG investor?
When it comes to ESG Investing, investment managers proactively seek out companies that have done well in all three E, S and G categories. They use a number of reputable databases to determine each company’s ESG rating. The good news is that investors may not have to sacrifice potential financial returns because portfolio managers look for companies that include positive ESG factors rather than try to exclude firms that rate poorly on ESG factors.
Socially Responsible Investing (SRI), which was a forerunner to ESG Investing, focused on completely excluding industries or companies that were involved in business activities that were perceived as irresponsible. For example, an SRI strategy may have entirely excluded stocks in the energy sector because of public perception that oil and gas companies were bad for the environment.
An ESG strategy, by contrast, might thoughtfully consider how companies are helping improve the environment. For example, an oil and gas company that commits resources to clean-energy technologies and reduces carbon emissions could be included in an ESG portfolio. An investment manager’s strategy could include selecting more stocks and bonds from companies that rate well on environmental factors, and reducing stocks and bonds from firms that have low environmental scores.
Overall, an ESG approach may help investors allocate capital to companies that align with their personal values but allow them to remain diversified in their investment choices.
RegentAtlantic’s ESG Approach
Our research team spends a great deal of time looking into equity and fixed-income funds that have management teams who are serious about environmental, social, and governance issues. We aim to implement a diversified strategy while keeping costs to a minimum.
Our team also uses several third-party scoring systems to help us objectively assess each fund’s ESG risk and efficiency. These tools help us include portfolio companies that are committed to the top ESG characteristics we seek for our investment portfolio.
If you want to be sure that your investment choices reflect your key values, RegentAtlantic can help. Please ask your wealth advisor about including an ESG strategy in your portfolio.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.