There’s a trendy new moniker that’s meant to designate which companies and investment funds are “doing the right thing.” It’s called ESG, which stands for environmental, social, governance. Socially responsible investing is not only gaining popularity, it’s also outperforming traditional funds.
Under environment, independent research firms may look at carbon emissions, pollution and water usage to rate a company. For social, they may weigh employee diversity, fair labor practices and human rights. For governance, criteria is based on company board diversity, executive pay, political contributions and more.
ESG not only empowers investors to put their money where it reflects their values, but it also pressures companies to become more sustainable.
“There are companies who have said, ‘What can I do to be included in your index or your mutual fund or portfolio? What am I missing,'” said Kimberly Griego-Kiel of Horizons Sustainable Financial Services.
Griego-Kiel has advised clients in the socially responsible investing (SRI) space for decades. She said it started as a niche market but has seen it explode with interest in the past few years, especially as people zero in on environmental and social justice issues.
ESG funds are not just good for the heart, she explained, but also good for the wallet.
“Companies that treat their employees better, that take care of the environment, that have women in the C-suite, all tend to perform better,” Griego-Kiel said.
A Morgan Stanley report found that sustainable equity funds outperformed traditional funds by 2.8% in 2019 and 3.9% in the first half of 2020.
Griego-Kiel warned that there’s no perfect company in the ESG space but a few funds she personally thinks represent the space well include Calvert, Green Century Funds and Pax World Funds.
“Any fund that I might mention is something that each individual investor should discuss with their own advisor to see if it meets their particular needs,” she said. “This is not a recommendation for investment.”
There is no exact definition that classifies ESGs across the board since ESG risks are different for every industry. There is also no official rating system, though research firms like MSCI and JUST Capital independently score companies based on the criteria.
“There are so many funds out there now that I think it’s important for people to really look at the prospectuses if they’re doing it on their own and see what their social and screening criteria are, because there are a number of funds who will screen for one or two things and call it an ESG fund,” she said. “That’s not good enough for us or our clients. We want to make sure that it’s a broadly social-screened fund.”
GORDON GEKKO: THE POINT IS, LADIES AND GENTLEMEN, GREED IS GOOD. GREED WORKS.
SIMONE DEL ROSARIO: MAYBE 30 YEARS AGO, GORDON GEKKO, BUT THESE DAYS, SOCIALLY RESPONSIBLE INVESTING IS ALL THE RAGE.
IN FACT, TWO THIRDS OF INVESTORS SAY THEY THINK THEY HAVE A RESPONSIBILITY TO INVEST IN COMPANIES THAT WILL MAKE THE WORLD A BETTER PLACE, ACCORDING TO THE FINANCIAL WEBSITE MAGNIFY MONEY.
BUT HOW DO YOU KNOW WHICH COMPANIES ARE TRULY “DOING THE RIGHT THING?”
THERE’S AN ACRONYM FOR THAT!
IF YOU HAVEN’T ALREADY, GET READY TO START HEARING A LOT MORE ABOUT THESE THREE LETTERS: E, S, G. IT STANDS FOR ENVIRONMENTAL, SOCIAL, GOVERNANCE.
IT’S AN INVESTMENT STRATEGY BASED ON HOW WELL COMPANIES AND FUNDS PERFORM IN THESE THREE CATEGORIES, WHICH NOT ONLY EMPOWERS INVESTORS TO PUT THEIR MONEY WHERE IT REFLECTS THEIR VALUES, IT ALSO PRESSURES COMPANIES TO BECOME MORE SUSTAINABLE.
KIMBERLY GRIEGO-KIEL: THERE ARE COMPANIES WHO HAVE SAID, “WHAT CAN I DO TO BE INCLUDED IN YOUR INDEX OR YOUR MUTUAL FUND OR PORTFOLIO? WHAT AM I MISSING?
SIMONE DEL ROSARIO: KIMBERLY GRIEGO-KIEL HAS ADVISED CLIENTS IN SOCIALLY RESPONSIBLE INVESTING FOR DECADES.
KIMBERLY GRIEGO-KIEL: IT WAS REALLY VERY MUCH A NICHE MARKET.
SIMONE DEL ROSARIO: BUT SHE’S SEEN THAT MARKET EXPLODE WITH INTEREST THE PAST FEW YEARS, ESPECIALLY AS PEOPLE ZERO IN ON ENVIRONMENTAL AND SOCIAL JUSTICE ISSUES.
ESG FUNDS, AS THEY’RE NOW KNOWN, ARE NOT JUST GOOD FOR THE HEART. THEY’RE ALSO GOOD FOR THE WALLET.
KIMBERLY GRIEGO-KIEL: COMPANIES THAT TREAT THEIR EMPLOYEES BETTER, THAT TAKE CARE OF THE ENVIRONMENT, THAT HAVE WOMEN IN THE C SUITE, ALL TEND TO PERFORM BETTER.
SIMONE DEL ROSARIO: A MORGAN STANLEY REPORT FOUND THAT SUSTAINABLE EQUITY FUNDS OUTPERFORMED TRADITIONAL FUNDS BY NEARLY THREE PERCENT (2.8%) IN 2019, AND NEARLY FOUR PERCENT (3.9%) IN THE FIRST HALF OF 2020.
HAMDI ULUKAYA: WHERE COMPANIES ARE ESG FOCUSED, ENVIRONMENT, SOCIAL, GOVERNANCE, DIVERSITY, INCOME INEQUALITY, THESE ARE BECOMING A PART OF COMPANIES’ RESPONSIBILITIES WHICH IT SHOULD BE.
SIMONE DEL ROSARIO: HAMDI ULUKAYA IS THE FOUNDER AND CEO OF GREEK-YOGURT MAKER CHOBANI. HE’S BIG ON THE ESG SPACE AND IS LOOKING TO TAKE HIS COMPANY PUBLIC.
ACCORDING TO REUTERS, THE INITIAL PUBLIC OFFERING FOR CHOBANI COULD BE VALUED AT MORE THAN $10 BILLION.
HAMDI ULUKAYA: THE SOLE PURPOSE OF BUSINESS IS NOT JUST MAKE MONEY FOR THE SHAREHOLDERS. IT IS TO MAKE SOCIETY A BETTER PLACE.
SIMONE DEL ROSARIO: WHEN LOOKING TO INVEST IN COMPANIES AND FUNDS THAT ALIGN WITH YOUR PERSONAL VALUES, EXPERTS SAY TO KEEP A FEW THINGS IN MIND. FIRST, THERE’S NO PERFECT COMPANY. THERE’S NO EXACT DEFINITION THAT CLASSIFIES ESGs ACROSS THE BOARD SINCE EVERY INDUSTRY IS DIFFERENT. AND THERE’S NO OFFICIAL RATING SYSTEM.
YOU CAN USE RESEARCH FIRMS LIKE MSCI, BLOOMBERG AND JUST CAPITAL THAT INDEPENDENTLY SCORE COMPANIES BASED ON ESG CRITERIA.
KIMBERLY GRIEGO-KIEL: THERE ARE SO MANY FUNDS OUT THERE NOW THAT I THINK IT’S IMPORTANT FOR PEOPLE TO REALLY LOOK AT THE PROSPECTUSES IF THEY’RE DOING IT ON THEIR OWN, SEE WHAT THEIR SOCIAL AND SCREENING CRITERIA ARE, BECAUSE THERE ARE A NUMBER OF FUNDS WHO WILL SCREEN FOR ONE OR TWO THINGS AND CALL IT AN ESG FUND. THAT’S NOT GOOD ENOUGH FOR US OR OUR CLIENTS. WE WANT TO MAKE SURE THAT IT’S A BROADLY SOCIAL SCREENED FUND.
SIMONE DEL ROSARIO: THREE FUNDS GRIEGO-KIEL LIKES ARE FROM CALVERT, GREEN CENTURY FUNDS AND PAX WORLD FUNDS.
BUT IT’S NOT INVESTMENT ADVICE. SHE SAYS WHEN IT COMES TO THE PERSONAL BUSINESS OF INVESTING WITH YOUR PERSONAL VALUES IN MIND, IT’S BEST TO SPEAK WITH A FINANCIAL ADVISOR OR DO THE RESEARCH YOURSELF.
WHETHER YOUR MOTIVATION IS SAVING THE PLANET, PROMOTING DIVERSITY OR JUST AVOIDING RISK, ARE YOU LOOKING TO INVEST IN THE ESG SPACE? LET ME KNOW IN THE COMMENTS.