The Informed Investor
This is the second article in a series on ESG Investing (Environmental, Social, Governance Investing). Click here to read the first.
Most long-time investors have sometimes felt that they had to choose between their values and making money. Usually, holding a large, diversified portfolio meant you likely ended up with an oil or tobacco company investment that paid well but did not do much good for the planet.
Is that even possible? For a while, no one could be sure. But recent research is bringing us good news: you can earn competitive returns and feel like you are making a positive difference in the world.
First, Some Definitions
First of all, what are we even talking about? Socially responsible investing has a formal name: ESG Investing which is broken down as follows:
E is for Environmental
Each investment is screened for environmental criteria, such as the company’s record on polluting, water use, and resource conservation efforts.
S is for Social
Next is social criteria. Here, factors evaluated may include worker health and safety, diversity, contributions to the community, and issues surrounding privacy and security.
G is for Governance
Finally, G is for Governance, meaning factors that may include ethics, transparency, and shareholder rights.
Of course, these factors are not evaluated in a vacuum. Instead, they are reviewed alongside traditional metrics such as revenues, profit margins, competition, etc.
But What Kind of Result Can You Expect?
It was long assumed that investing for social reasons would make you feel good, but probably compromise your results. Fortunately, research now suggests you do not have to choose between good returns and your ethics.
Based on research, ESG Investing is not only shown to match conventional investments in performance; ESG Investing is showing it can even beat them.
A study by Morningstar reviewed the performance of sustainable funds in Europe over a 10-year period ending in 2019. The study analyzed data over one, three, five, and ten years, as well as during the start of the COVID-19 crisis (first quarter of 2020).
Researchers found that 58% of the sustainable funds outperformed their traditional counterparts over the longest period, 10 years.
The outperformance was even higher over shorter timeframes:
- 4% of socially responsible funds outperformed their peers over 5 years
- 5% beat traditional funds over 3 years
- 6% won over one year[i]
Of course, this is a relatively new investment theme, and there is no guarantee the outperformance will continue. However, it is encouraging to know that investment results seem, based on this data, very comparable to their competitors.
The Eye of The Beholder
It is easy to wonder what actually counts as a socially responsible investment. The “ESG” aspect is usually applied as an additional screen used after finding those investments that also meet traditional financial requirements.
But when it comes to applying the ESG screens, a lot of the criteria will depend upon the fund manager, ESG rating agency, or whoever is doing the reviewing. However, some major themes are found in today’s ESG investment funds:
- As you may have guessed, technology is often a significant holding. This is no surprise, as technology is dramatically cleaner than a manufacturing or mining business, for example.
- According to research by RBC and Credit Suisse, Microsoft was the most commonly held stock, making a showing in over 55% of ESG funds.
- Alphabet, VISA, Apple, and Xylem rounded out the remainder of the top five holdings.
- Drug stocks also showed up, with Amgen and Merck becoming more popular.[ii]
More Options Coming Soon
According to Morningstar, money continues to pour into sustainable funds at a record pace: an estimated $10.4 billion in the second quarter of 2020.[iii] With this volume of money flow, we will likely see many new options in the future.
Right now, we are already seeing specialty funds emerge. For example:
Want to support clean energy? There are many options for you, from Green Tech investment funds to those specializing in solar.
Want to support gender diversity? There is a gender diversity ETF, with an appropriate ticker symbol: SHE.
The list goes on, and given the popularity of ESG investing, there will likely be more to come.
Why Now is the Time to Consider ESG Investing
Today, it is getting easier and more economical to include these social factors in your investment preferences. In the past, there were few resources widely available for reference; doing your homework involved time-consuming research and guesswork.
If you work with a financial advisor, he or she probably has even more resources at their disposal to evaluate these factors. And these sources are growing by the day, as more and more money flows into this segment.
Today, you can have your cake and eat it, too: it is possible to earn competitive returns while investing with your heart and conscience.
ICC is a fee-only fiduciary financial advisor that has been offering independent, transparent wealth management services for decades. We are here to help our clients with their ESG questions and investing. If you have $1,000,000 or more in investable assets, contact us today to learn more about our services.
[i] Hale, Jon. “Sustainable Funds Continue to Rake in Assets During the Second Quarter.” Morningstar, Inc., 30 July 2020, www.morningstar.com/articles/994219/sustainable-funds-continue-to-rake-in-assets-during-the-second-quarter.
[ii] Stevens, Pippa. “Sustainable Investing Is Set to Surge in the Wake of the Coronavirus Pandemic.” CNBC, CNBC, 7 June 2020, www.cnbc.com/2020/06/07/sustainable-investing-is-set-to-surge-in-the-wake-of-the-coronavirus-pandemic.html.
[iii] Stevens, Pippa. “Sustainable Investing Is Set to Surge in the Wake of the Coronavirus Pandemic.” CNBC, CNBC, 7 June 2020, www.cnbc.com/2020/06/07/sustainable-investing-is-set-to-surge-in-the-wake-of-the-coronavirus-pandemic.html.
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