Originally published 07.16.2020
There has been a long-simmering debate in investing circles: Can you do well and do good at the same time? Aren’t they mutually exclusive?
For years, many investors believed that to avoid companies and industries whose activities contradicted their values, they would need to give up some returns. Or they believed that constructing diversified, professional portfolios meant living at odds with their personal beliefs. The conventional wisdom was that practicing environmental, social and governance (ESG) investing came at the expense of financial performance. That’s no longer the case.
A September 2018 report from DWS found a positive correlation between ESG and corporate financial performance. This means businesses that treat workers well, are responsible stewards of the environment and prize diversity can gain a competitive advantage.
Investors Take Notice
Unsurprisingly, individual investors want to have a hand in shaping corporate behaviors around ESG issues, and they’re making their preferences known. The amount of money under professional management associated with sustainable and responsible strategies has increased significantly in recent years, representing one in four dollars in 2018.
Corporations are responding to this dynamic. A couple years ago, 86% of companies in the Standard & Poor’s 500 published sustainability or corporate governance reports, according to the Governance & Accountability Institute; in 2011, just one in five did.
Defining The Terms
Today, the term ESG is commonplace. An earlier iteration of this investing strategy went by the name of socially responsible investing (SRI). While ESG and SRI share many traits, they are not the same. SRI is largely an exclusionary approach, calling for the avoidance of certain industries and practices like tobacco, firearms, gambling and adult entertainment. ESG, on the other hand, takes a more expansive view and aims to reward companies that are displaying positive behaviors.
The strategy starts by looking at companies throughout the capital markets and their financial performance. ESG is among a host of due diligence considerations that has the potential to drive or inhibit performance.
Because ESG is such a broad framework, it can mean different things to different people. At our firm, when we use the term ESG, we are referring to three main ways portfolio managers practice it:
1. Sustainability and shareholder impact: This is the most active form of impact investing, where large institutional investors try to change companies from the inside through their ownership stakes. They participate in actions like shareholder resolutions or taking board seats.
2. Socially responsible investing: This involves filtering out companies based on their involvement in controversial activities and products.
3. Integrated risk management: Some investors might not be comfortable excluding entire industries or companies. They prefer a portfolio tilted in favor of companies with better sustainability ratings, while underweighting others.
Building Your Impact Portfolio
Many investors have a growing sense that the planet is in crisis, and they want to do something about it, whether that’s on issues of climate change, human trafficking, or diversity and inclusion. Seeking out companies that are working to solve these big challenges is increasingly the way for many to express their views.
Today’s screening tools allow advisers to analyze funds and strategies through an ESG lens, giving investors greater control over the impact their money has. Some investors are deeply concerned about climate change. Others feel equally passionate about diversity and inclusion. Still others give equal weight to a broad range of issues, and they want to own shares of companies that are aligned with those concerns.
Advisers can take those considerations into account when constructing portfolios. They can also provide ongoing monitoring to further ensure strategies continue to comply with the ESG principles that earned them a spot in a client’s portfolio in the first place.
What’s more, it’s now possible to build diversified ESG portfolios, because nearly all asset classes contain funds and strategies that apply these principles — even those that don’t explicitly market themselves as ESG.
Ready For Impact?
As ESG investing continues to evolve, it is important to work with a trusted adviser to help navigate the process of finding the right investment for you. Just know that you don’t have to compromise on your personal beliefs to pursue your financial goals. ESG and impact investing give you an opportunity to put your money to work in a way that aligns with your values — without compromise.
Content in this material is for general information only and not intended to provide specific advice or recommendations. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment adviser. Private Advisor Group and Bleakley Financial Group are separate entities from LPL Financial.