There are many ways you can express your opinions and values in 2019. Did you know you can express your values in the way you invest your money as well? Perhaps you’ve heard of socially responsible investing, or ESG investing (environmental social governance), and thought it was only for people who lean to the left politically.
Let’s bust our first myth around ESG investing.
Many people across the political spectrum care about the environment, child labor, data security and privacy, executive compensation, and corruption. There are ESG investment options for people of varying religious and political backgrounds.
Now, let’s do a quick review of ESG investing. What was known as socially responsible investing (SRI) is now commonly known as ESG investing. Why the change? In the past, SRI often focused on excluding certain industries. Or, it meant only investing around certain themes (i.e. clean water, wind energy, etc.). This sometimes led to highly concentrated and more volatile portfolios, as compared to other standard benchmarks of performance. (Benchmarks give investors a way to monitor their investments’ performance and risk.)
Environmental social governance, on the other hand, has shifted to a best-in-class model. By using a best-in-class method, investment managers can include companies in areas of the economy that traditionally have been excluded from SRI, such as heavy-
polluting oil and gas companies. However, some energy companies may be investing significant money in alternative energy research, and an ESG investment manager may wish to include them in a fund or index. Simply put, ESG investing takes a more nuanced and inclusive view of companies.
Let’s bust a few more myths around ESG investing.
Myth 2: All ESG mutual funds are the same.
There are a wide variety of ESG investment strategies. Some only screen for environmental or social issues, other funds focus on investing in companies that have significant numbers of women in management. There are mutual funds that support Catholic values, Islamic values, and Southern Baptist Convention values. While many of these funds have overlap, there are unique differences. Ask your financial advisor for help navigating this process.
Myth 3: ESG investing means you should expect worse investment results.
ESG investing does not necessarily mean you need to sacrifice returns. “Past performance is not indicative of future results” is a frequent disclaimer in financial services, and it’s true. MSCI (a global index provider) produced a study showing that companies that score
well on ESG metrics historically have been associated with lower risk and comparable returns, relative to companies that do not score as well on ESG metrics. Search the phrase “MSCI ESG investing” for more information online. It is important to note that some of the same tenets of traditional investing still apply. Namely, costs matter and asset allocation is important. So watch those expense ratios.
Myth 4: You have to go all-in on ESG investing.
Too often, people seem to get trapped in false dichotomies. In life, not everything is either/or. The same idea applies to ESG
investing. Translation: It’s okay to dip your toe in the water and see how it goes.
While it may not be right for everyone, there is increasing interest in ESG investing. If you are interested in learning more, the Forum for Sustainable and Responsible Investment (USSIF) has many excellent resources available on its website (usssif.org/sribasics). If you work with a financial advisor, ask her or him to help you explore your options.
This article is intended solely for educational purposes and does not constitute investment advice. Please consult with your financial advisor before making any changes.