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Ecological, Social, and Governance (ESG) Investing

Feel Good, Make Money, and Manage Risk

These are three things that you don’t normally hear in one sentence from the financial industry when they advertise how to invest your hard-earned money. Most of the time, firms and their advisors are highlighting the performance of their investment portfolios or why their stock, bond, mutual fund, or ETF is a great investment opportunity.

A little over 25 years ago, a small group of investment management companies started to promote their investment focus from a different perspective: they started what were called socially responsible funds and they were encouraging people to “invest with their conscience”. Many of the original funds highlighted the fact that they would not invest in “sin companies” for their investors. These are companies that manufactured or distributed firearms, tobacco, alcohol, gambling, oil, or coal. This allowed people to feel good that they were not supporting vice, violence, and potential environmental disasters. Unfortunately, the performance of these funds suffered in comparison to popular stock indexes, like the S&P 500, because many of them included “sin companies”. Gun violence, climate change and sexual harassment, to name a few, are now impacting the share value of companies that are seen as contributors to these problems for which our society is trying to deal with.

Even with lower performance, socially responsible investment strategies started to gain more traction with institutions like charitable trusts, sovereign funds, and endowment funds. This new focus is taking place because those who are responsible for the investment decisions, like board members and trustees, recognized the importance for the underlying investments they oversaw to be aligned with the guiding principles and beliefs of those who had placed the money in their care. Funny how a few major lawsuits that found board members to be personally liable for their decisions (governance) has influenced this change!

Performance is still important, which has motivated investment managers to further develop their investment strategies to meet both the performance and the ecological/social/governance requirements investors want. Recent history would indicate they have been able to do just that.

The MSCI All Cap World Index is a good representation of equities around the world and when compared to the MSCI ACWI Sustainable Impact Index you will note that the performance issue of the past is no longer an issue.


Source: Morningstar Office. The chart above is used to compare the performance of the MSCI ACWI All Cap Index to the MSCI ACWI Sustainable Impact Index from November 1st, 2015 through March 31st, 2019. The indexes used are for illustrative purposes only and do not reflect actual indexes.


What was once an arcane institutional investment concept and strategy that was scarcely known by the average investor has now become a regulatory requirement for all publicly funded plans and trusts across Europe. It is now also being adopted by many of the public pension plans, trusts, and endowment funds in the US. Today there is over $30.7 trillion dollars (Global Sustainable Investment Alliance (GSIA)) in what are known as “Impact”, “Sustainable”, or “ESG” (environmental, social, governance) investment funds. What is even more important is that many are also top performing funds, with the majority doing at least as well as those in their investment style peer group.

The next question you might have is “How risky are these funds?”. Analysis would indicate that the answer is equal to or less. The primary reason for this is that in our social media-based world, where bad news travels faster than the speed of light, the impact on share prices is almost instantaneous when bad news comes out about a company that exercised poor judgement. Sustainable and ESG investing can take some of this risk out of the equation by screening out companies that have exhibited some of the behaviors or are have business practices that could potentially put them in the social media spotlight.

Forty years ago, 83% of the pricing for a company’s stock was based on tangible value (assets, earnings, debt ratio, profit margins etc.) and 17% on intangibles (goodwill, reputation). Today those numbers are reversed with 87% of the value of the S&P based on those intangibles (Source: Ocean Tomo 2015 Intangible Asset Market Value Study). For evidence of this, look at how many companies in the past few years have lost massive share value because of the gender discrimination/abuse, disregard for the environment (BP), or poor governance (VW, PG&E). Over the last five years, ESG funds have proven to be less volatile and sensitive to the negative news that is constantly bombarding the markets.

The investment merits and the ability to make sure that your money is invested in companies that will operate consistent with your beliefs is catching on very quickly. The challenge is finding the right fund(s) to make sure you not only feel good about your investments, but also receive a good rate of return and not take too much risk.

So how hard could it be to invest successfully with your conscience? The simple truth is that it is not that easy. There is a whole new lexicon, terms, and definitions to learn about and understand like sustainable, socially responsible, impact, gender, ecological, governance, and ESG. There are also specialized areas like ocean, animals, water, climate, etc. The following provides examples of the most common ESG factors that is becoming a standard for the industry:


Source: Impact Investing: The Performance Realities, By:Anna Snider


Adding to the challenge is that there are well in excess of 800 different funds available to the average investor today. Analyzing and identifying the right fund out of this universe to meet an individual investor’s preferences requires a lot of time and research.

So, if you like the idea of investing with the knowledge that your money is working for things that you believe in, perform well, and are less volatile, it is now a viable investment option. The biggest hurdle for investing in ESG funds is sifting through all the information and finding the right fund(s) for you.  For more information, please give us a call and we will be happy to share what we have learned and work with you to help you match the things you care most about to how you invest your wealth.

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