The Informed Investor

This is the third article in a series on ESG Investing. Read the additional articles:

ESG a Real Thing or Passing Trend in Investing?

ESG Investing: Can You Do Good and Do Well at the Same Time?

Financial Planning: Getting Started with ESG Investing

In this third article in our series on ESG Investing, we want to provide practical information to add to your strategy.  We will give you insight into what to avoid in this new ESG investments arena.

ESG Investing, also called socially responsible investing, has taken the investment world by storm. The pandemic has put this trend into overdrive, with new companies and investment funds jumping on the bandwagon.

Of course, many corporations and fund managers are highly committed to this more ethical form of investing. But as in almost any situation, big money can bring out those who either do not know as much as they should or have other motivations.

Either way, it is imperative that you understand what to avoid when your money is at stake.

1. Beware of “greenwashing”

The push toward ESG investments (which stands for Environmental, Social, and Governance) is not just happening in the financial sector. There are significant cultural and political pressures to move other aspects of our lives in this direction. With all these pressures, any public company will easily look for ways to increase its attractiveness on these ESG investment fronts. This is often referred to as “greenwashing.”

Greenwashing can differ from actual efforts to make a business more sustainable using these factors. So do not just believe a claim or a line on a website; realize that these may be attempts to capitalize on this trend.

2. Reporting standards do not really exist yet

ESG is still in the “wild west” phase regarding concept maturity. Several firms now act as ESG rating agencies. Similar to bond rating agencies (such as Standard & Poor’s, Moody’s, and Fitch), these companies set out to define metrics and rank firms based on ESG factors.

However, because the field is so new, there are no regulations and very few established standards. So, investors are somewhat at the mercy of information providers.

Additionally, because companies are not required to report on ESG factors, there’s not even high-quality data available in many cases. As a result, there may be substantial inconsistencies in the raw data, resulting in inconsistent or inaccurate ratings.

3. Larger firms can look better than they actually are

When it comes to ESG ratings, size matters. Research suggests that a “size bias” may result in larger firms having higher ESG scores than smaller ones, on average.[i] However, that does not mean that large companies do better things for society or the environment than smaller firms. Instead, it is more likely the result of these big firms having more resources to devote to developing specific ESG policies and programs.

4. Certain sectors may generate strange results

The industry attempts to rate companies with a “sector-neutral” approach. However, some sectors have far more sustainability challenges than others (for example, oil and tobacco). Because of this “sector-neutral” approach, some oil companies may receive higher-than-average ESG ratings. Until there is a system for ranking these industries more appropriately, keep an eye out for these counterintuitive results.

5. Ratings you see today may be out of date

Because of the current lack of reporting requirements and standards, a “rating” may go out of date quickly. Change in management or other factors may impact company policies or activities, but due to infrequent reviews, may not be picked up for a few years. Hopefully, as new ESG rating technologies and standards are introduced, review points can be more frequent, and this will not be as much of an issue. But for now, those ratings should be looked at based on a specific point in time, not based on frequent updates.

What is in an ESG Rating?

ESG is an exciting development in the investment world, but we need to remember that it is still in its early stage.

ESG ratings should not be looked at as facts. Here is why: a research team at the Massachusetts Institute of Technology (MIT) found that the “correlation” between ESG ratings from different agencies was low when compared to the differences found between bond rating agencies. This team concluded that the information investors receive from ESG rating agencies could be called “noisy.” Another referred to it as “aggregate confusion.”

Changes on the Horizon

While the U.S. has not enacted any regulation, the European Union, fortunately, has taken concrete steps in that direction.[ii] A plan is now in place that will require portfolio managers in Europe to explain how they applied minimum safeguards to determine whether companies are indeed following a sustainable path.

Final Words of Advice

The U.S. is, unfortunately, not keeping up with Europe on any proposed regulatory changes yet. So until then, it is critical to keep in mind that ratings are only opinions, not facts. Until this industry has some regulation and standards on its side, ratings need to be seen primarily as the beginning of research, not the end.

LEARN MORE ABOUT ESG INVESTMENTS WITH ICC

If you’d like to learn more about our ESG investment planning services and have $5,000,000 or more in investable assets, contact ICC founder Randy Garcia at 702-871-8510 or [email protected].

[i] Doyle, Timothy. Ratings That Don’t Rate: The Subjective World of ESG Ratings Agencies. 7 Aug. 2018, corpgov.law.harvard.edu/2018/08/07/ratings-that-dont-rate-the-subjective-world-of-esg-ratings-agencies/.

[ii] Randazzo, Roberto, and Fabio Gallo Perozzi. “EU Sustainable Finance & ESG Factors: Recent Legal Implications for Investors and Entrepreneurs.” Lexology, Law Business Research, 2 Sept. 2020, www.lexology.com/library/detail.aspx?g=befb9df7-2e88-4f03-bd62-c541b88590a3.

IMPORTANT DISCLOSURE INFORMATION

The Investment Counsel Company of Nevada (“Company”) is an SEC registered investment adviser located in Las Vegas, Nevada. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Company’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Company’s web site on the Internet should not be construed by any consumer and/or prospective client as Company’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by Company with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of Company’s current written disclosure Brochure discussing Company’s business operations, services, and fees is available from Company upon written request. Company does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Company web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s).

Certain portions of Company’s web site (i.e. newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, Company (and those of other investment and non-investment professionals) positions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.

Please Note: Limitations

Neither rankings and/or recognition by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any designation or certification, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Company is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see below as to participation data/criteria, to the extent applicable). Unless expressly indicated to the contrary, Company did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Company by any of its clients.

ANY QUESTIONS

ICC’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including the criteria used for any reflected ranking. Please review Important Disclosure Information set forth in the last section of this website.

The Barron’s Top 1200 Financial Advisors by State ranking is based on data provided by over 4,000 of the nation’s most productive advisors. Factors included in the rankings are: assets under management, revenue produced for the firm, regulatory record, quality of practice, and philanthropic work. There is no cost or fee to participate in this survey. The questionnaire is completed and submitted online.

The Barron’s Top 100 Independent Advisors ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms, and the quality of the advisors’ practices. The scoring system assigns a top score of 100 and rates the rest by comparing them with the top-ranked advisor. There is no cost or fee involved to participate in this survey. The questionnaire is completed and submitted online.

The Forbes “America’s Top Wealth Advisors” ranking was developed by SHOOK Research and is based on in-person interviews and telephone due diligence meetings and a ranking algorithm that includes client retention, industry experience, review of compliance records, firm nominations and quantitative criteria, including assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports.  Rankings are based on the opinions of SHOOK Research, LLC and not indicative of future performance or representative of any one client’s experience. Rankings and recognition from Forbes are no guarantee of future investment success and do not ensure that a current or prospective client will experience a higher level of performance results, and such rankings should not be construed as an endorsement of the advisor.  Neither Forbes nor SHOOK Research receives compensation in exchange for placement on the ranking.

The Forbes ranking of “Best-In-State Wealth Advisors,” developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years experience, and the algorithm weights factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Neither Forbes or SHOOK receive a fee in exchange for rankings.