The Socially Inspired Investor ESG in Focus

What’s in Your ESG Parts I & II

Charles Hamowy, CFP®, CPA/PFS – Editor In Chief
Seasons of Advice Wealth Management, LLC.

Originally published: April 26, 2019

When it comes to socially responsible investing or what is now being widely adopted as ESG – Environmental, Social and Governance, ask yourself if you really care about all of these categories equally? The methodology that almost all ESG evaluators use to identify and score, or rate, potential ESG investments generally relies on averages within each of these components.

Scoring is useful if you care about overall adherence to ESG but this may not mean what you think it does. 

So far, the investment community has decided investors need to be interested in all these things if you want to invest in a sustainable way. Be aware though that ESG standards alone do not necessarily reflect specific values or concerns, or what we refer to as areas of concern. And good luck trying to find a filtering system that can. At least for now that data is mostly available at an institutional level.

This becomes an interesting conversation when deciding on which investment approach you should choose. Are you looking for an average representation of all three E, S and G? Or are you primarily concerned about specific areas such as global warming, controversial weapons, or gender issues? Defining the values you wish to include in your investment strategy can result in many different approaches.

For decades the rivers that fed socially responsible investing were well stocked with an adequate array of investments considered to be socially responsible, mostly in the mutual fund world. Well known firms such as Calvert, MSCI, Ariel and TIAA were known for this. Today the bulk of ESG investing seems to be toward passively managed socially responsible index funds from firms such as Vanguard, T. Rowe Price and JP Morgan, with more and more coming out each day.  

No doubt the decision to pursue socially responsible investing is a very personal one. You may have decided that you would even allow for a slightly lower return or increase in volatility – which by the way is most definitely not a given. Kiplinger cites Morningstar analyst David Kathman who says that “There is no evidence that shows ESG or socially responsible investing helps or hurts performance.”  “Over the long term, it probably evens out,” he added. [i]

Perhaps at this point you have already found one of the many socially responsible ETF’s or mutual funds available to investors- well done, you did it! 

Well…maybe, not so much. It turns out that it is much more complicated than that.

Consider that of the tens of thousands of mutual funds and ETF investments available in the marketplace, roughly only 25% would receive an “above average or better” rating from the ESG rating firms. That’s still a tremendous amount of options for a socially responsible investor to choose from. How can you go wrong?

However, if for example you didn’t want your money to support controversial weapons, tobacco or animal testing you’d be surprised to find that a majority of these supposedly highly filtered ESG funds and ETF’s do have significant exposure to these activities. Just because one does not want to support these activities it doesn’t mean that they aren’t acceptable to the ESG rating companies.

In part 2 of What’s in your ESG? we’ll take a deeper dive into ESG certification and standards.

Special thanks to Saad Tahir for providing critical research for this article.


[i] Kiplinger 7 Great Socially Responsible Mutual Funds


What’s in your ESG?  Part 2

In Part 1 of What’s in your ESG? we reviewed some of the basics of ESG investing and options available for the ESG investor. In this Part 2, we’ll examine in greater detail the questions surrounding ESG certification and options available to the investor.

A leading consumer “seal of approval,” or another certifying standard governing ESG investing, does not yet exist. But as the demand for ESG investing continues to grow, the outcry for industry standards becomes louder. And the demand for ESG investing is definitely there, and the financial community is listening. In fact, a 2017 study by Morgan Stanley reports that over 75% of investors are interested in sustainable investing. Among women and millennials, interest in sustainable investing runs even higher, with 84% of women interested and 86% of millennials interested in ESG investing.

The need and demand for objective standards is here. But in what form will they come? Will it be marketing, driven by the underlying companies themselves (think low fat, green coloring on packaging, etc.) or will there be a one day “Gold Seal of Approval” from a trusted independent third party? Hard to say since so many of the investment criteria are subjective. What investors need is more data to make better decisions.

Although objective certification for the consumer may be just around the corner it is encouraging that a number of investment professionals have already signed on to a program sponsored by the United Nations based on their Principles for Responsible Investment (PRI). The basic certification criteria for this is primarily based on consistency and disclosure. It’s a start, and while certification is gaining momentum, it is not quite there yet to be employed for ones personalized ESG investment portfolio.

The European Federation of Financial Analysts Societies (EFFAS) may be getting closer and has defined topical areas for the reporting of ESG issues and developed Key Performance Indicators (KPIs) for use in financial analysis of corporate performance.

So, while not perfect, it’s a good start. What should you do? Should you wait until there is more readily available data? With many different stakeholders, universal certification may take many years, and only seems to be getting more complicated as time move on. But if investing based on your values is your goal, you certainly can begin to implement a strategic investment strategy today. 

If there are specific areas of concern that you want to focus on it may be best to begin with individual securities that would give you the most control. However, if you do choose individual securities be sure to prudently diversify enough in order to fill a holistic asset allocation model that can include the proper allocation of bonds (you can choose “green bonds” representing specific environmental funding) as well as equities of companies with a good sustainability record.

When considering a dive into individual securities a good way to start is to consider a particular industry. Technology companies, surprisingly enough, are generally good for the “E”. Socially responsible and Governance are more problematic though since these qualities tend to be more subjective. There are also increasing concerns over gender diversity and other related issues that are further defining Governance ratings.  

Simply accepting an industry label that a fund or a company’s investment scores well in overall ESG does not mean it necessarily is right for you, your specific values or your investment goals. We all look forward to, and welcome, more analytical tools and better ways to use them to reach our values-based investing goals. 

The best thing you can do is ask plenty of questions and be purposeful in your selection process. Maintaining an open dialogue with your trusted financial advisor is paramount to helping one achieve their goals and objectives. This is a pathway to helping you get you closer to a more focused ESG solution while understanding that the ESG landscape is ever evolving – and that is a good thing.

Special thanks to Saad Tahir for providing critical research for this article.


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