Environmental, Social, and Governance (ESG) Investing

What is ESG investing?

Many people feel strongly about certain causes. This has led to the emergence/rise of investment strategies that focus on identifying and screening companies for characteristics related to the environment, social issues, and corporate governance.

In particular, certain investment strategies are now available which include or exclude companies based on how they deal with ESG factors.

However—at this point in time–there is no explicit definition of what an “ESG” compliant company is or is not.

Is ESG investing costly?

One of the first questions related to ESG investing is regarding whether there is a “price to be paid” for screening out what are often thought of as the “sin stocks.” Great question!

While there is no explicit definition of what is/is not an ESG “stock,” we can look at the mutual funds that position as supporting ESG causes. When we look at these funds, we see that there is a very high (around 90% overlap) with the stocks in these funds versus the Russell 3000 index (i.e., the 3000 largest companies in the US stock market).

We do see that the ESG stocks tend to (i) have a slightly lower market capitalization, (ii) a slightly higher valuation (price to book), and a slightly higher level of profitability.

Are ESG investments right for you?

That’s a loaded question! I won’t offer an opinion on whether ESG funds are or are not “right” for anyone. What I will say is that—in my opinion— each person needs to have an investment strategy that they are comfortable with and can stick with through the ups and downs of the market.

Personally, I am comfortable with using the concept of ESG to screen stocks for inclusion in a mutual fund/investment strategy. The reason for this is NOT because I agree or disagree with the ESG concepts. Rather, it’s because there is a large enough overlap with ESG stocks and the total stock market that you can get adequate coverage of the market.

I do think it will be interesting to watch how this strategy performs over time. It certainly appears that there is much more interest in the topic. It would seem, therefore, that the demand for these stocks would be higher and market economics would suggest prices would follow suit and be higher as well. However, I’ve learned better than to forecast economics!

A word of caution

I would encourage anyone exploring the use of this strategy to spend time to adequately research funds that put themselves forward as “ESG.” The absence of well-defined criteria has funds diverging significantly in what is “in” and what is “out.” Similarly, the effectiveness of companies in this space is not always what it seems.

You can read a bit more information on this topic here.

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• Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?

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If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.

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