Environmental and social issues are dominating headlines. Increasingly we are hearing about environmental, social governance (ESG) investing. Is this just a marketing ploy or is there validity to ESG-focused brands? In order to answer those questions, let’s first break down what “ESG investing” actually means.
ESG in A Nutshell
ESG stands for environmental, social, and governance—these are a grouping of non-financial factors that evaluate the sustainability of a company or fund. The goal of ESG investments is to utilize capital assets to find ways that positively impact society at large, whether it be through social means or environmental ones. ESG investing gives individuals the opportunity to conscientiously grow their portfolios in ways that might better align with their social values.
While “socially responsible investing” may seem like a trendy concept plucked from the Twitter feeds of today, the idea to allocate money for ESG-like securities dates back to the 1950s. During this post-World War II boom, trade unions began investing their considerably large pension funds in altruistic areas like affordable housing projects and health facilities.
In fact, so many individuals and institutions are shifting focus to ESG-considerations that global sustainable fund flows hit a record high of $45.6 billion in Q1 of 2020. The United States was responsible for contributing a whopping $10.4 billion to that total.
Is ESG Investing Right For You?
Okay, so sustainable investing is popular, but does it work? Various studies have shown that ESG investments are becoming more competitive both in price and performance. An article released by The Forum for Sustainable and Responsible Investing curated studies from many reputable sources, stating that, “investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices.”
Another recent report published by Money Management Institute and The Investment Integration Project summarizes why investors are beginning to consider ESG-inclusive portfolios:
- Companies with sustainability in mind are better at managing risk and have “less systemic volatility than their conventional peers.”
- Capital costs are lower at companies that participate in sustainability practices, which encourages growth, shareholder returns, and often positively impacts the value of the company.
- Private equity and debt-focused sustainable investments are shown to achieve market-rate returns.
With sustainable investing growing in popularity, it’s important to work with a knowledgeable advisor who has experience and knowledge in the area of ESG investing to see if it is right for you. Unfortunately, there are a lot of companies that may falsely use the ESG label to attract more investors, when in reality they are not sustainable brands. This misleading behavior is called “Greenwashing.”
Don’t Get Fooled by Greenwashing
It can be hard to spot which companies are actually invested in making sustainable change and which companies are taking advantage of a trend. Without concrete regulations and/or definitions of sustainable criteria, it’s up to the company to decide whether or not they fall under the ESG classification—which means there’s lots of room for interpretation. As the popularity of ESG investing grows there is a growing movement to standardize metrics for ESG and put in place requirements to use this term.
Given the ambiguity of the term ESG, here are a few things to help you do your due diligence and look out for and avoid Greenwashing in your funds. Of course, working with a trusted advisor is the best way to make sure the funds truly meet your personal goals.
- Do your research. If a company or fund makes a claim about their ESG-practices, check their website and certifications to make sure this claim is backed up. Vague or inconsistent claims are a red flag. Actual ESG companies should be completely transparent and proud to share their data.
- Watch what they do, not how they market. A popular greenwashing practice is using buzzwords on product packaging, such as “all-natural,” “earth-friendly,” “non-toxic,” “100% organic”, etc. These words are useless without actions to back up their existence. Just because a house cleaning brand has a product with the word “green” on the label, doesn’t mean the company falls into the ESG category.
- Be familiar with the rules. For example, many products are quick to point out that they are CFC-free. CFCs are gaseous compounds that can be found in refrigerants, cleaning solvents, and aerosol propellants. While getting rid of toxic gas is certainly an environmental win, CFCs are now banned. So, the claim “CFC-free” may look good on paper, but in reality, it’s required by law and therefore not a good indicator of sustainability.
Morningstar offers a Sustainability Rating tool to help you figure out if a company you’re interested in investing in has a strong background in sustainability. Using an objective facts-based tool such as Morningstar may help you avoid falling victim to false marketing.
Overall, the growing interest in ESG investing marks an opportunity for those who are interested in taking on a more socially and environmentally, conscientious investing strategy. However, data is key when parsing through all the investments claiming to be socially responsible. While there aren’t universal metrics to measure sustainability, regulators are looking at creating standards for labeling investments as such.
Whether you work with a trusted advisor or on your own, ESG investing is yet another option to grow your wealth. Many investors may not be concerned about environmental or social compliance and simply want to grow their portfolios; ultimately, ESG may still make sense as part of a well-diversified plan offering potentially more stability than non-ESG offerings.
With the current push for the use of electric vehicles, alternative energy, and reductions in carbon emissions, ESG investing will continue to receive more attention.
Since 1990 the mission of Carver Financial Services has been to Make People Lives’ Better. As part of this mission, we offer ESG compliant strategies. ESG is certainly not for everyone and continues to evolve. We can discuss what is important to you and figure out how to invest your overall portfolio in a way that meets both your needs and personal values whether that includes ESG or not.
Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2.1 billion in assets for clients globally, as of July 2021. Randy and his team, work with individuals who are in financial transition as a result of divorce, retirement, or the sale of a business. You may reach Randy at email@example.com.
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.
Incorporating sustainable investing criteria into the investment selection process may result in investment performance deviating from other investment strategies or broad market benchmarks.