How to Profit from Your Values
An important aspect of Environmental Social Governance (ESG) investing is the opportunity to align your values with your dollars. This has been a rapidly expanding part of the investment universe leading to more investment options, more dollars behind those investments, and more impact on corporate behavior. Flourish Wealth Management has been supporting clients’ investment portfolios with ESG strategies for the past few years and has been more actively introducing this investment option to clients for the past 12-18 months. ESG isn’t for everyone, and we don’t put any pressure on clients to include these themes into their investments. However, in a period of significant social disruption, this is an opportunity to provide additional insights into ESG investing.
What is ESG Investing?
The common element across ESG investment strategies is a focus on a few or many themes to reflect the personal values of the investors. There has been significant growth of the ESG industry, growing from less than $500 million in 2013 to well over $1 billion in 2020. In fact, ESG investment strategies have attracted new investors during 2020 as a reflection of people directing their money to strategies that support important themes and in recognition of the strong performance from ESG investments. The most effective way to view these investments is by looking at Environmental (E), Social (S), and Governance (G) separately along with their underlying themes:
What’s important to note is that (a) there are a lot of options to choose from and (b) they are not mutually exclusive. Based on the broad array of investment opportunities, it is now possible to incorporate a single theme into a portfolio, a few that are most relevant to you, or a broad variety. Our goal at Flourish is to build a customized portfolio that fully aligns with each investor’s values and the investment themes that most resonate with them.
How Would My ESG Dollars Make an Impact?
Due to the significant growth of ESG dollars in both the US and Europe, most public companies are now required to provide ESG-related information in their financial statements. The availability of that information is a direct result of large mutual funds and Exchange Traded Funds (ETFs) requiring that transparency before they will invest in a company. The heightened level of transparency has provided important insight into the operations of a public company along with their leadership teams. Another vital tool for ESG investors is the “Proxy Vote” which is the annual vote required for each public company to elect their Board of Directors, approve the Executive Team, and announce their key initiatives for the next year. ESG investors are voting against proxies that fail to include diversity at the Board and Executive level, in terms of both gender and race. Investors are also submitting “Shareholder Resolutions” to guide corporate leadership in a direction that is more friendly to Environmental, Social, and Governance themes.
ESG investment strategies will either screen out stocks and bonds that fail to meet the stated investment criteria or will only invest in those options. For example, an exclusionary approach could eliminate exposure to tobacco, guns, high carbon emitters, or companies with poor gender equality. Or a strategy could only invest in companies with zero carbon emissions, clean technology, or diverse boards. These investment options are not mutually exclusive, which provides our team with a lot of flexibility to build a diversified portfolio.
How has ESG Fared in 2020?
This question has a double meaning. The usual question is whether or not ESG investments can perform as well as traditional investments. In fact, the initial argument against ESG is that limiting investments in certain companies would also put a limit on investment potential. However, based on a review by Morningstar, ESG-themed strategies had better performance in the volatile first quarter of 2020 than their peer universe of managers and the relative Index. Most of the outperformance was due to the higher quality of companies in ESG portfolios. At this point, we have seen enough evidence to determine that choosing to include ESG in a portfolio will not have a meaningful impact on long-term performance.
The other aspect of ESG investing is whether or not it’s had a positive impact on corporate behavior. This has been a resounding success across companies in the US who have responded to the calls from investors to lead their companies in a more socially and environmentally friendly fashion. Just a few examples so far this year include:
- Adidas announced that a minimum of 30% of all new positions at Adidas and Reebok will be filled with Black and Latino people. The company will also finance 50 University Scholarships for black students each year over five years.
- IBM will no longer offer general-purpose facial recognition or analysis software since it is against its use in mass surveillance, racial profiling, and violations of basic human rights and freedoms.
- Goldman Sachs announced that they will refuse to take a company public for an IPO unless it has at least one woman or non-white board member.
- BlackRock has committed to voting all proxies based on Board diversity, focus on environmental risks and opportunities, corporate strategy to support sustainability, and a commitment to build a diverse workforce.
These announcements are a small sample of the changes taking place around the world as a reflection of both the social climate and the activism of ESG investors. We expect to see similar changes in the future and support the ongoing accountability from ESG mutual funds and ETFs to ensure those changes are maintained if not improved over time.
The opportunity to align your values with your investments is just that, an opportunity. Our goal is to provide education about this opportunity to investors. We are also proactively researching investment opportunities to ensure we can provide a diversified portfolio that is fully aligned with a client’s specific set of preferences. This is also a time in our society where people are looking for ways to make an impact, and ESG could be one of those options. Our team is happy to provide additional education about ESG investments, provide a questionnaire to help clients identify what themes are most important to them, and then build a portfolio that can incorporate those themes while working toward your long-term goals. We look forward to continuing the conversation!
Jon Hale, Director of ESG Research at Morningstar, article dated July 8th, 2020
The Wall Street Journal on June 9th, 2020
CNN Business on June 9th, 2020
Forbes on January 23rd, 2020
CNBC on January 14th, 2020