At Private Wealth, our fiduciaries are diligent about educating clients on all angles of their investment decisions, no matter what strategies interest them most.
Over the past decade, for example, we saw an increased interest in faith-based strategies. And, there have always been people who request our help to invest in companies that demonstrate community values. While most of our clients still prioritize performance over a particular cause, our advisors are capable of helping you customize a strategy based on your direction.
Lately, political contention has launched the topic of ESG investing into the headlines. ESG stands for environmental, social and (corporate) governance. As fiduciaries, we believe it’s important that our individual and institutional clients understand what ESG investing really means and how it can be best applied to a portfolio.
What Is ESG Investing?
ESG investing is an industry term that originated with a basic personal preference to invest money in companies that demonstrated some form of social responsibility and aligned with an individual’s personal values. For instance, climate change and environmentally friendly business practices currently sit at the top of many investors’ minds.
As this trend gained traction, more and more companies reported on their efforts to be more environmentally and socially conscious. Nowadays, there is an independent ESG rating system, which makes data available to investors to help assess a company’s efforts in these three areas of responsibility:
- Environmental: What is the company’s overall impact on the environment? This can include its carbon footprint, handling of toxic chemicals and the choices it makes about sustainability throughout its supply chain.
- Social: What is the company’s impact on the social good of its employees, the community in which it operates as well as broader communities? This can include employee safety and equality, labor benefits, consumer protections, and human rights standards at home and abroad.
- Governance: Does the company operate with fair and transparent standards? This can include policies regarding fair board governance, the diversity of a company’s leadership, corporate ethics and transparent accounting methods.
How Does ESG Investing Work?
ESG investing can be accomplished through a variety of methods, from direct stock purchases to mutual funds and exchange-traded funds that specialize in this type of investment. ESG investing can range from the deliberate inclusion of specific investments because of a company’s sustainability efforts to the deliberate exclusion of companies that an investor feels are higher risk for controversy.
Bottom line: There are a lot of ways individual and institutional investors can approach ESG investing, if that’s important to them or their constituents. Maybe it’s all in, maybe it’s of no interest at all, and maybe it’s simply a choice to invest in a high-ranking ESG option if all else is equal.
Are There Benefits to an ESG Strategy?
Investors who choose an ESG approach generally do so out of a desire to “vote with their dollars” and to hold companies accountable to business practices that benefit the greater good. There is also a common assumption that they choose this approach at the price of optimal returns.
In 2022, ESG performed similarly to the regular market. This was due in large part to renewable energy stocks performing so well in 2022. We know that you can’t look at just one year, but overall, I don’t think there should be concern that ESG will negatively impact overall portfolio performance. If your investments are aligned with your personal philosophy, community values and/or faith values, whatever those may be, you are more likely to stick with your long-term goals without deviating, and that is the more crucial benefit.
How Do You Best Evaluate an ESG Investment?
At Private Wealth, we always believe the best place to start is with your goals. If you’re interested in ESG investing, we want to fully understand what that means to you in order to design a portfolio that is mission-aligned with your values.
There is a system for ESG scoring that can serve as one tool for researching conscious companies. However, this is still a young area of the industry, and the checks and balances on the validity of the scores are still being debated and developed. Ultimately, we wouldn’t recommend seeking out companies based solely on a good ESG ranking.
Above All: Your Portfolio, Your Choice
Everyone has personal preferences about how they direct their money. Whether you want to prioritize performance, personal and community values, or some combination of both, our Private Wealth advisors can help.
Talk with a Private Wealth advisor about customizing your portfolio for your priorities and values. If you’re interested in specific ESG companies, let us know.