You may have heard of Socially Responsible Investing (SRI), Sustainable Investments or Environmental, Social, Governance (ESG) funds.  But, what exactly are these?  These terms are often interchangeable and have grown from what was an obscure sliver of the market just a few years ago into common vocabulary today. 

Over the past year, we’ve received a lot of interest for socially responsible investing.  Many of our clients wonder if there’s a way to be more impactful with their investments.  In addition to positive returns, they have a desire to support social change. 

Have your voice heard – One way to encourage corporations to make a change, is to have a significant number of stockholders pushing them to do so.  Investors can pool their votes together to accomplish a similar goal.  Over the past few years, the number of votes that “social” investors control has dramatically increased and it has proven to be an effective way to stimulate modifications to corporate business practices.

Some social funds are focused on certain aspects and others take a more general approach.  Below, we’ve identified the primary foundational elements of many ESG funds:

E - ENVIRONMENTAL: This aspect of investing focuses on sustainability and resource efficiency. There is an emphasis to reduce the negative impact of operations, manage water scarcity, mitigate the impact on natural capital, diminish climate-related risks, reduce carbon emissions, and drive sustainability innovation.  A common exclusionary screen is to remove fossil fuels from investment consideration.

S - SOCIAL: This is a wide-ranging theme.  Often there’s an emphasis on companies that support social values such as human rights, promoting diversity and gender equality, commitment to employees and workplace standards, and health/wellbeing of consumers.  Sometimes there is a commitment to avoid companies that profit from potentially harmful goods/services like tobacco, weapons/firearms, alcohol, and adult entertainment.  There are even some funds that cater to a particular religious doctrine where the investments are screened within the confines of the faith. (NOTE: We don’t use religiously screened funds unless they’re specifically requested.)

G - GOVERNANCE:  This investment screen seeks accountable corporate governance, ethical business practices and transparent operations.  Companies that fit these criteria develop effective boards or other governing bodies that reflect expertise and diversity of perspective.

In reality it’s easier to coin a term than it is to incorporate a large number of people’s values into an investment process.  We believe that the adage of “perfect is the enemy of good” is a reasonable perspective to use.   Every company will have a blemish or something that could be argued as going against ESG values.  While I’ve yet to meet someone that hits the recycling bin 100% of the time, some are better than others.  The worst offenders are screened out for investment purposes, while those companies with the best characteristics are favored for investing.

It’s important that our portfolios maintain diversification throughout the globe, between various industry weightings, as well as small to large company allocations.  It’s also prudent that close attention is paid to investment costs.   These requirements help you not take too much risk in any one specific area of the market or diminish investment returns by paying high of costs to implement these practices.   

We invite you to let us know if ESG investing might be important to you and we will discuss how best to incorporate these values into your investment portfolio.