ESG (Environmental, Social, Governance) investing involves a set of characteristics used to evaluate potential investments, and their impact on society at-large. These factors generally include how a company cares for and impacts the environment, how it handles relationships with employees, customers, suppliers and the community surrounding its locations, and how governance issues such as executive pay, diversity, policies and controls, and shareholder rights are managed.
ESG is the next generation of what was first known as SRI (Socially Responsible Investing). SRI took an exclusionary approach by prioritizing the removal of certain industries (think alcohol, tobacco and firearms) with little regard for the resulting performance. ESG investing flips this on its head. Instead of looking to exclude companies that engage in certain practices, ESG looks to overweight those companies who take positive action regarding ESG areas of concern, and enact positive change as shareholders of those companies where improvements are needed.
What are some specific factors considered for ESG Investing?
- Carbon emissions
- Water quality and scarcity
- Energy sources and control
- Environmental impact of supply chain
- Environmental impact of products
- Development of human capital
- Privacy and data security
- Sourcing of raw materials
- Product quality and safety
- Workplace diversity
- Workplace safety
- Board structure
- Corruption and supply chain management
- Political contributions and lobbying
- Accounting policies and controls
- Executive compensation controls
How is ESG usually deployed?
Generally there are four different approaches to determining investment opportunities based on ESG factors:
Exclusion: Removal of companies that by their very nature go against the ESG characteristics above (e.g. crude oil refining, gambling industry, tobacco products, etc.)
Inclusion: Investing not just in companies with neutral ESG ratings, but purposefully investing in those businesses who take these factors seriously.
Advocacy: Working as a shareholder to engage with senior management to encourage improvement in ESG areas.
Niche Areas of Focus: Religious or faith-based management of ESG is an additional layer that some firms add for those clients who have a deep devotion to their beliefs.
Who may want to consider ESG Investing?
Most people and businesses align their values and their giving. But many don’t know that it’s possible to align their values with their investments. ESG Investing can provide the avenue for that, based on your particular concerns, values, and opinions. As your financial planner, we can answer your questions and advise you on considerations so we can see if this type of investment makes sense for you!
Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.