Has the newest IPCC report had you considering your impact on the environment? Have you been thinking about justice, equity, diversity, and inclusion (JEDI) efforts? Perhaps you’re worried that you’ve invested in corporations that harm the environment, damage communities, or don’t have a diverse set of people and perspectives in their workforce or leadership team. If this sounds like you, it’s time to look into a values-based investment strategy known as ESG (environmental, social, governance) investing.
One early instance of values-based investing was Muslim investors needing funds that eliminated haram (not permitted under Islamic Law) business activities. Funds were created that didn't include bonds or other interest-based investments, companies with high debt, and companies involved in industries at odds with Islamic principles, including: pork, liquor, gambling, insurance, and pornography.
Nowadays, there are funds that seek to screen out all sorts of businesses that are at odds with people’s values. ESG is one screen for people wishing to reduce the environmental, social, and governance impacts of their investments. Environmentally, an ESG fund might consider a corporation's CO2 emissions, water pollution, resource consumption, and waste management practices. Socially, the fund could look at the corporation’s employee diversity, human rights record, HR policies, and transparency. From a governance perspective, the fund could examine the board’s diversity, political contributions, executive pay, lobbying, and scandals. Funds might also choose to intentionally screen out industries seen by some as controversial including: tobacco, alcohol, gambling, firearms, pornography, pharmaceuticals, oil, or defense contractors.
ESG investing has been increasing in popularity, and asset managers are taking note. In January 2020, Larry Fink, the CEO of BlackRock, the world’s largest money manager, wrote to investors stating: “Climate change has become a defining factor in companies’ long-term prospects.” Fink continued that BlackRock, “believe[s] that sustainable investing is the strongest foundation for client portfolios going forward,” and has changed their investment strategy to one where “sustainability [is] at the center.” These days, many of the largest asset managers have one or more ESG fund products available.
Despite the backing of some of the world’s largest asset managers, many people are apprehensive to begin ESG investing. Some folks are concerned that the deliberate exclusion of controversial investments could have an impact on financial return, since many well-performing securities do not necessarily fit ESG fund’s criteria. Fortunately, ESG funds tend to outperform traditional funds, especially during periods of turmoil such as COVID-19. From March 2020 through March 2021, 19 of the 26 ESG funds that the S&P Global Market Intelligence analyzed, outperformed the S&P 500. Even during “normal” times, countless studies analyzed by researchers at NYU Stern found “positive correlations between ESG performance and...stock performance...”
If you want to begin ESG investing, or at least look at the ratings of some corporations, there are several tools you can use. Yahoo Finance has a sustainability tab where you can view a security’s ESG risk rating for free. Just search for a company and the sustainability tab will be right next to holders. Another free option is Morningstar’s security search tool. Just click the sustainability tab after you’ve searched the security you’re interested in. Both Yahoo Finance and Morningstar use Sustainalytics as their ESG ratings provider. Sustainalytics is a paid service that offers a more detailed breakdown of ESG risk ratings.
If you’re interested in transferring your investments to an ESG or other socially responsible fund, contact your financial advisor and ask about their ESG fund products. If you’d like more personalized and expert advice on ESG investing, consider switching to a boutique firm that specializes in ESG investing.
ESG investing is not going to single handedly save the environment, transform communities, or make up for generations of inequity and discrimination. But, as more and more people choose to invest through an ESG lens, a very clear message of action on environmental, social, and governance impacts will be sent to Wall Street.
Will Barror is the Sustainability Fellow at Walking Mountains Science Center.