What Is ESG Investing?

We often field questions from investors about ESG investing. Let’s take a look at what it means, its benefits, and our own ESG strategies.

Socially responsible investing (SRI) involves aligning your portfolio with your values. Investors have been doing this for decades, but the practice burst into the mainstream recently under the ESG (environmental, social and governance) moniker. It’s all about making a positive impact with your investments.

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What Is ESG Investing?

At its core, ESG investing distinguishes between companies that prioritize environmental, social and governance factors and those that don’t. Individuals pursuing ESG investing may favor companies that provide services and products they believe achieve social good while avoiding those they perceive to be detrimental to society. For instance, alcohol, tobacco, gambling and weapons companies are often omitted from ESG portfolios.

Broadly speaking, ESG strategies consider the following categories when assessing a company for inclusion in an ESG equity or bond fund:

• Environmental: Relates to conservation of the natural world and resources, including factors such as climate change and carbon emissions, waste management, deforestation, renewable energy adoption, etc.
• Social: Considers people and relationship factors including customer satisfaction, gender and diversity awareness, labor standards and human rights
• Governance: Covers issues related to board diversity, executive compensation, lobbying efforts, bribery and corruption scandals, shareholder rights and accountability, and succession planning

Tip: ESG rating agencies examine a company’s environmental, social, and corporate governance policies to determine if the organization is walking the talk. The dilemma is that the agencies don’t have a common rubric to measures a company’s score.

For example, one rating agency might consider carbon emissions more critical than employee training programs, and it will weight those categories accordingly. Another agency might evaluate the same company but determine that employee training programs are more important, thereby producing a different rating.

Advantages of ESG Investing

Whatever the scoring criteria, the goal for an ESG portfolio remains the same: To do well while doing good. Translated into investment parlance, this means earning a reasonable return while investing in companies that help improve our world.

Here are some potential upsides for companies—and investors—that embrace ESG:

• Solid management practices can reduce employee turnover and increase productivity
• Conserving water and minimizing waste can lower operational costs
• Good ESG practices can attract consumers who care about corporate responsibility
• Reducing climate impact and resource depletion can decrease operational or supply chain disruptions
• Employee diversity stimulates innovation and original thinking
• Meeting ESG standards can help mitigate costly legal, reputational and operational risks that could harm long-term financial performance

ESG is monitored by an ever-expanding network of regulations and supported by governments and financial authorities—increasing the likelihood that the ESG movement is here to stay. All of this can be positive for companies and add value for stakeholders.

Adviser’s ESG Investment Strategies

If you want your investments to have an impact on business and society, we have strategies to help. Our investment committee actively positions client portfolios based on their assessment of the economic environment and opportunities in the investment markets.

ESG Core

Our ESG Core portfolio is a globally diversified strategy investing primarily in exchange-traded funds (ETFs) that meet well-defined ESG metrics. We tailor this portfolio to meet a range of growth and income objectives and keep fees low.

ESG Dividend Income Stock

Our ESG Dividend Income Stock portfolio invests in large U.S. companies with a history of paying and growing dividends over time. This stock-only strategy is designed to be a component of a diversified core portfolio. Our in-house Dividend Income Team applies the same stock selection approach we use with other portfolios, eliminating stocks that don’t meet our clear-cut ESG criteria. Here’s how it works.

First, we identify stocks issued by high-quality companies that fit a specific dividend-growth profile. Many income-oriented investors focus purely on a stock’s absolute yield. We think yield growth is equally important, so our team looks for stocks that provide both a competitive current yield and the potential for growth in that income stream.

We then eliminate companies that are in the oil exploration, alcohol, tobacco, gambling, and weapons/defense industries.

Next, the team puts qualifying dividend-growth stocks through an ESG filter to ensure only companies that meet the standards established by MSCI (a reputable index curator in the industry) are represented in client portfolios.

The result is a concentrated selection of high-quality, dividend-paying stocks that align with our clients’ desire to invest in socially responsible companies.

Learn More About Adviser’s ESG Portfolios

If you are a client, please reach out and we’d be more than happy to help.

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