Environmental, social, and governance (ESG) investing is a particular type of investing strategy that has grown in popularity with more socially conscious investors in recent years. ESG investing takes a broader picture into account when evaluating companies, examining the total ethical impact of a company. Investors who gravitate toward the ESG model are naturally motivated to improve their communities and the world, viewing social responsibility and financial prosperity not as an “either/or” proposition but as two components of a holistic approach.
ESG Ratings
ESG investing depends on a system of ratings based on each of the three identified areas. ESG is different from other models in that its requirements are more specific. Other more generic terminology refers to investing styles that are sometimes similar in approach, such as “impact investing” or “socially responsible investing.”
There is no central uniform body of criteria that scores or indexes companies based on ESG factors; private rating firms develop their own standards. Environmental ratings take into account factors such as management of greenhouse gas emissions, carbon footprint, waste disposal, and pollution. Social factors include a company’s involvement in building a stronger community, creating equal employment opportunities, ethical product sourcing, and human rights. Governance ratings look at factors such as the pay structure and demographic makeup of a company’s leadership as well as its responsiveness to shareholders.
Financial Performance
You do not have to sacrifice profitability to follow your values. In fact, some data suggest that the same principles that make a company attractive to an ESG investor can also improve the bottom line of a company. The Morgan Stanley Institute for Sustainable Investing released a study that examined the performance of more than 3,000 mutual funds and exchange-traded funds in 2020. The study found that funds focused on “environmental, social, and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios.” The same study found that sustainable equity funds outperformed non-ESG peer funds by a median total return of 4.3 percent in 2020. (1) The Institute’s 2019 study similarly found that sustainable equity funds “outpaced traditional peer funds by a median of 2.8 percentage points.” (2)
Getting Started With ESG Investing
It’s easier than you might think to start building your own ethical portfolio with ESG investing. The amount of sustainable investment opportunity has grown aggressively over the past several years as investors direct funds into companies demonstrating a commitment to building a better world. In just two years, flows into sustainable open-end and exchange-traded funds have increased by a factor of nearly 10 times, totaling $51.8 billion in 2020 vs. $5.4 billion in 2018, according to a recent Morningstar report, which identified 369 sustainable funds at the end of 2020. (3) The recent trend toward socially conscious investing has spurred an upswell in companies that share similar values.
Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
How I Can Help
If you are interested in the possibility of building a more ethical portfolio or investing in sustainable companies as part of your personal financial strategy, I’d love to have a conversation with you to see if we’re a good fit to work together. Email me at jim@glhcfinancial.com or give me a call at 916-276-8677.
About Jim
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources, knowledge, and experience to help his clients experience simplicity and clarity in their financial life. Jim spent over 20 years working for GE Financial Advisors, both in their insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
Jim is a member of the Financial Planning Association of Northern California and National Association of International & Financial Advisors (NAIFA). He has served as a board member of several nonprofit organizations and has been involved in Cub Scouts leadership and youth sports coaching. Jim lives in Folsom, CA, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities such as kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.
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(1) https://www.morganstanley.com/ideas/esg-funds-outperform-peers-coronavirus