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Got the latest IPCC report Do you consider your impact on the environment? Have you given some thought to the Justice, Justice, Diversity and Inclusion (JEDI) Efforts? You may be concerned that you’ve invested in companies that are damaging to the environment, harming communities, or lacking diverse people and perspectives among their workforce or leadership team. If that sounds like you, it’s time to look into a values-based investment strategy called ESG (Environmental, Social, Governance).
An early example of value-based investing was Muslim investors in need of money, the haram. eliminated (Not permitted under Islamic law) Business activities. Funds were created that did not include bonds or other interest-based investments, companies with high debt, and companies in industries that contradict Islamic principles, including: pork, liquor, gambling, insurance, and pornography.
Nowadays there are funds that try to weed out all kinds of businesses that are contrary to people’s values. ESG is a screen for people who want to reduce the environmental, social and governance impact of their investments. From an environmental perspective, an ESG fund could consider a company’s carbon footprint, water pollution, resource use and waste management practices. In the social field, the fund could examine employee diversity, human rights record, human resources policy and the transparency of the company. From a governance perspective, the fund could examine board diversity, political contributions, executive salaries, lobbying and scandals. Funds could also choose to purposely hide industries that some consider controversial, including: tobacco, alcohol, gambling, firearms, pornography, pharmaceuticals, oil, or defense companies.
ESG investing is growing in popularity and wealth managers are taking note. In January 2020, Larry Fink will become the CEO of BlackRock, the world’s largest wealth manager, wrote to investors: “Climate change has become a determining factor in the long-term prospects of companies.” Fink continued that BlackRock “believes”[s] that sustainable investing is the strongest foundation for future customer portfolios “and has changed its investment strategy so that” sustainability ” [is] at the center. “Today, many of the largest asset managers have one or more ESG fund products on offer.
Despite the support of some of the largest wealth managers in the world, many people have concerns about starting out with ESG investing. Some people fear that deliberately excluding controversial investments could have an impact on financial returns, as many stocks that perform well do not necessarily meet ESG fund criteria. Fortunately, ESG funds tend to outperform traditional funds, especially in turbulent times like COVID-19. From March 2020 to March 2021, 19 of the 26 ESG funds analyzed by S&P Global Market Intelligence outperformed the S&P 500. Even in “normal†times, countless studies analyzed by NYU researchers found Stern “Positive correlations between ESG performance and … share performance …”
If you’re starting out with ESG investing, or at least looking to look at the ratings of some companies, there are several tools you can use. Yahoo Finance has a sustainability tab where you can view a security’s ESG risk score for free. Just search for a company and the Sustainability tab will appear right next to the owners. Another free option is Morningstar’s security search tool. Simply click on the Sustainability tab after you’ve found the security you want. Both Yahoo Finance and Morningstar use Sustainalytics as a provider of ESG ratings. Sustainalytics is a paid service that provides a more detailed breakdown of ESG risk assessments.
If you are interested in transferring your investments to an ESG fund or other socially responsible fund, contact your financial advisor and ask about their ESG fund products. For more personal and expert advice on ESG investing, consider switching to a boutique firm that specializes in ESG investing.
Investing in ESG will not single-handedly save the environment, transform communities, or offset generations of inequality and discrimination. However, as more people choose to invest in ESG, a very clear message of action will be sent to Wall Street on the environmental, social and governance impact.
Will Barror is a Sustainability Fellow at the Walking Mountains Science Center.
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