ESG investing and socially responsible investing

ESG Investing: Our Perspective

June 14, 2021

This week’s reader question concerns “socially responsible” investing:

What is Adviser Investments’ perspective on ESG investing and how should we, as investors, be thinking about this opportunity (particularly considering Biden’s legislative agenda)? Are companies with strong “ESG scores” higher-quality companies that we should be focusing on?

Portrait of Liz LapradeResearch Analyst Liz Laprade had this to say:

ESG investing has grown in popularity in recent years, but at Adviser Investments, it’s business as usual.

In the simplest of terms, the goal of ESG investing (the acronym stands for “environmental, social and corporate governance”) is to invest in companies that are cognizant of how their businesses affect the environment and are taking steps to protect it, treat their customers and employees right, and are run by people focused on boosting shareholder value in an ethical and responsible way.

Put like that, you realize that those are factors that good stock pickers should always consider—regardless of whether their funds or portfolio objectives are labeled by platforms and product providers as “ESG” or not.

The tricky part of investing in self-described ESG funds is that there is no agreed-upon metric for scoring companies on ESG measures.

Even companies with strong “ESG scores” based on one or another measure aren’t always synonymous with high quality. Often, companies score well in only one or two out of the three ESG pillars, yet their scores average out to a good overall ranking.

Take Tesla, for example. Some ESG raters score it highly on environmental factors. Others would contend, though, that Tesla’s automotive batteries are the product of rapacious mining for raw minerals and hence should rate lower on environmental scores. The company also arguably rates lower in corporate governance given founder Elon Musk’s sometimes outrageous behavior and flouting of regulations.

Research Analyst Liz Laprade is pictured with the quote: "For us, and the managers we invest in, ESG factors are an important part of whether a stock is a buy or sell. Score or no score, we think it’s a positive that corporations are being pressed by investors to make their companies cleaner and more socially responsible."

For us, and the managers we invest in, ESG factors are an important part of whether a stock is a buy or sell. Score or no score, we think it’s a positive that corporations are being pressed by investors to make their companies cleaner and more socially responsible. It has always been (and will always be) important to consider ESG and any unethical or environmentally irresponsible event when making investment decisions on a given stock. We and our managers certainly do.

In fact, a couple of years ago, Barron’s ranked actively managed mutual funds by a particular set of ESG criteria and several of our managers scored higher than many of the ESG-focused managers in the survey. Yet, “ESG” isn’t in the names of the funds they run.

In terms of the Biden administration’s agenda, a climate-change push would benefit electric vehicle and renewable energy companies. It would also have a further benefit for manufacturers supplying parts to these companies. If environmental legislation were to pass in Washington, we feel confident that our portfolio managers will do their best to position themselves to capture the upside as companies prepare for climate change and fight against it.

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