09.07.22
Beyond Dollars: The Role and Impact of ESG Investing
by: BISA Staff
ESG Defined:
Environmental, social and governance (ESG) criteria are a set of standards for a company's behavior used by socially conscious investors to screen potential investments. (Investopedia)
Socially responsible investing is becoming increasingly popular, and it's no secret this trend will continue.
While ESGs aim to accurately measure companies’ environmental sustainability and dedication to social causes, these funds have typically performed worse financially than other types of funds, per Harvard Business Review. Yet, investors are increasingly asking about incorporating ESG considerations in their portfolio mix.
Below, we generated a high-level roundup of articles that explain both why you should know about ESGs and what to expect from them in the near future — as well as some thought starters to consider individually and with your leadership team.
This article covers the four types of ESG funds to keep in mind as you advise clients on investment options. Vanguard describes these in more depth in their infographic here. See the highlights below:
1. Exclusionary Funds
These Index funds are built to avoid certain companies in specific sectors or industries (e.g., oil, weapons, tobacco).
2. Inclusionary Funds
These index or active funds include companies that have been evaluated on any number of ESG factors, with the goal of managing risk and maximizing long-term value.
3. Thematic Funds
These index or active funds invest specifically in certain kinds of companies.
4. Impact Funds
These funds have a unique, dual mandate: to make a positive environmental or social impact while also potentially generating higher returns. Unlike any other ESG products, they're always actively managed, thus might come with higher risk or fees.
Thought Starter: ESG funds are not one-size-fits-all. How are you approaching discussions with clients to get to the heart of what their investing goals look like, including when they say they are interested in socially responsible investing and/or ESG? Does their risk tolerance for ESG funds differ from their typical investing preferences?
The State of Texas has banned BlackRock, UBS and eight other finance firms from working with the state after finding them to be hostile to the energy industry. Glenn Hegar, the state's comptroller, named the firms he will prohibit from entering into most contracts with the state and its local entities after his office found they “boycott” the fossil fuel sector. The comptroller sent inquiries to more than 150 companies in March and April, requesting information on whether they were shunning the oil and gas industry in favor of sustainable investing and financing goals.
Thought Starter: While limited to doing business with the State of Texas itself, this ban could be a canary in the coalmine, so to speak, for firms with business and governmental relationships with ties to fossil fuels. How does this state government action and the potentiality for similar positions potentially impact your company's approach to ESG-minded financial advising.
This article by Deloitte discusses the benefits of ESG for investment management firms and their investee companies. Rather than the sole focus being ‘How much will this cost?,’ this piece focuses on what positive impacts will come, such as winning stakeholder trust and generating long-term financial benefit. Better working conditions and improved wages may lead to more innovation and employee loyalty over a long-term period, ending in positive social outcomes.
Thought Starter: ESG investing is investing in the long term. Understanding a client's goals and setting realistic expectations on returns — both financially and socially/environmentally — seem to be key to maintaining that client's trust. How are you best setting those goal posts and educating clients about long-term investing? Is there a past example unrelated to ESG that you could use to highlight the power of the long-term view?
And looking inward at your own company:
As discovered by Cornell University SC Johnson College of Business, currently $1 out of every $4 invested is involved in ESG — with no motive of slowing down. But what does this mean for a business exactly? Simply put, investing in ESG is an alternative approach to risk management. With an increase in demand for environmental and social change, investors are investing more in companies that they think will succeed in cultivating change in the world. Implementing ESG investing can positively impact the overall culture of an organization and lead to greater employee retention, quality of work and a better social environment.
Thought Starters: What is the proportion of investment in ESG within your own company — beyond advice to clients? Should there be more of an emphasis on ESG within your company based on indicators of improved company performance? What would that investment look like?
A Perspective Shared by a BISA Member
