Investing that Makes an Impact
Investors, especially Millennials, increasingly apply non-financial criteria when choosing companies or funds. They want to place their money with firms that share their values and avoid supporting those companies that fail to meet specific ethical standards. One way they build these ethical portfolios is through ESG investing.
What is Environmental, Social, and Governance (ESG) Investing?
ESG is an acronym for Environmental, Social, and Governance investing, sometimes known as socially responsible investing. ESG investing is a strategy of investing in companies that seek to make the world a better place through their stewardship of the environment, management of relationships, and corporate and financial leadership. ESG research firms, including Dow Jones Indices, Bloomberg, S&P, MSCI, Just Capital, and Refinitiv, score firms' ESG performances on a scale of 1 to 100. The higher the score, the better the firm performs against ESG criteria.
While ESG metrics, generally aren't part of mandatory financial reporting, many companies make sustainability disclosures as part of their annual reports. Several institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD), are working to form standards to facilitate the incorporation of ESG factors into investment choices.
The first category of criteria is environmental. Environmental factors look at how the company promotes conservation of the natural world. Environmental standards include carbon emissions, deforestation, air and water pollution, energy use, water use, green energy initiatives, and how the firm treats animals. The criteria also may consider any potential environmental risks a company faces and how it manages them. For example, a company with compliance issues with EPA mandates might receive a low score.
The second category is social. Social factors examine how the company manages its relationships with its customers, employees, suppliers, the community, and other stakeholders. ESG scores will consider, for example, whether the company contributes some of its profits to the community or encourages employees to volunteer. Another consideration is whether the company works with suppliers who hold the same values and how well it treats its employees. ESG scoring also frequently considers workplace policies regarding diversity and inclusion. Customer service ratings also are a factor.
The third category is governance. Firms that follow socially responsible governance criteria generally will have clear and transparent accounting systems, avoid conflicts of interest in their selection of board members, ensure that stockholders are allowed to vote on and be informed about key issues, and avoid giving political contributions for illicit gains or engaging in other forms of corruption. The criteria also consider whether board representation is diverse and whether executive compensation is appropriately tied to performance.
Benefits of ESG Investing
ESG investing has several benefits. The primary benefit is ensuring that you invest in companies that share your values. Many socially responsive investors also believe that companies meeting the ESG criteria will give the best risk-adjusted return on investment over the long term. Indeed, these companies follow practices that enable them to avoid certain risks, such as oil spills or emissions scandals that result in substantial stock price declines. During economic downturns, ESG funds have experienced less downside deviation than traditional funds, meaning traditional funds have a higher potential for loss. ESG funds also tend to perform as well, or in some cases, better than traditional funds in good economic times.
Looking to Begin ESG Investing?
Solas Wealth is an essential resource for an ESG investor. One of our investment strategies is "US ESG Select." The strategy seeks capital appreciation over complete market cycles while generally maintaining exposure to sustainable equities that meet ESG standards. We strive to take advantage of market opportunities while focusing on downside risk management by changing allocations in response to market conditions. This strategy includes downside protection, reduced portfolio volatility, improved risk-adjusted returns, and enhanced absolute returns over full market cycles.
Our leaders will light the way toward your goal of building wealth while also promoting positive change. Schedule a conversation with one of our team today.