ESG has been taking the investing world by a storm. According to PwC’s Asset and Wealth Management Revolution 2022 report, by 2026 asset managers are expected to increase their ESG-related assets under management (AUM) to US$33.9 trillion – up from US$18.4 trillion in 2021. But what is ESG, and what does it have to do with investing?
What is ESG?
ESG stands for Environmental, Social, and Governance, and it is a term used to more narrowly describe “sustainability” for businesses, corporations, and financial institutions. The three tiers of ESG outline the criteria used to set the standard for socially conscious investors to screen investments.
What is ESG Investing?
ESG investing, or socially responsible investing (SRI), is any investment strategy that seeks to maximize financial return while simultaneously advancing an idea, belief, or cause that is important to the individual investor. This can range from investments that support moral values, faith-based beliefs, or social trends, or simply take ESG factors and metrics into consideration in order to enhance long-term risk-adjusted returns.
Why ESG Investing?
There are many reasons to consider ESG investing, but our top 3 reasons are:
1. To make a positive impact
If you bought an EV and factored in the reduction of emissions and air pollution, it makes sense that the next step may be to move your long term investments into companies that are taking steps to reduce their emissions. ESG may even play a role in larger investments, such as buying a home in areas that are less likely to be severely affected by climate change.
A growing body of consumers are factoring sustainability into their everyday buying decisions. If you screen the causes you donate to and products you buy to make sure they align with your values and what you want to support, why wouldn’t you use a similar approach for where you invest the majority of your money?
2. To manage risk
ESG issues pose risks to operations, safety, litigation, and profits in any industry. When companies work to proactively address those risks, they are adequately preparing themselves for any potential business disruptions and lowering risk for shareholders, as well.
In a 2019 Morgan Stanley study that compared the performance of over 10,000 traditional and sustainable funds over 14 years, the global firm found no significant difference in total returns but strong evidence supporting greater stability in ESG funds.
3. To pursue a positive return
ESG is ultimately about both risk management and long-term value creation. It takes additional factors into consideration for the health of your investments, factors such as employee turnover, data breaches, or lawsuits. A common misconception is that ESG disregards financial data, but financial performance is a core component of ESG funds – they are just not the only consideration.
And the data shows that this approach pays off. In a 2021 review of 30 research publications on “the connection between ESG rankings or ratings and risk-adjusted listed equity,” PRI found several correlations between better ESG issue management and corporate financial performance. Research by Northern Trust Asset Management showed significantly higher annualized average returns for the top half of ESG leaders in both the Russell 1000 and MSCI World compared to the lower half over a 15-year period.
The Basics of ESG Investing
ESG investing has been growing exponentially in the last decade, and this means that there are a lot of new players in the ESG investment game. There is a growing need for experts as well as well-researched existing funds and fund criteria. The first step is to find professionals.
In 2019, the College of Financial Planning partnered with the US Social Investment Forum (US SIF) to issue a new financial planner designation called the Chartered SRI Counselor™ designation. This was the first major financial credential dedicated specifically to ESG and SRI investing, and is a great way for consumers to identify professionals that truly know the field. Just as you should always ensure your financial planner has their professional Certified Financial Planner™ designation, if you plan to invest with impact, ensure your financial advisors and investment professionals are Chartered SRI Counselors™.
Summary
ESG investing or SRI investing is a smart way for both consumers and businesses to make a positive impact, take more investment factors into consideration and manage risk, and maintain a positive return. Contact EGEA SRI to work toward a positive impact with your investments for an ROI you can be proud of.
