Increasingly, investors are thinking about ethics when deciding how to allocate assets. A popular option that encourages responsible investing is an ESG fund. This approach considers environmental, social, and Governance implications to guide the investor’s decision
What Does ESG Stand For?
ESG simply stands for environmental, social, and governance. Investors take these three aspects into account when assessing an investment opportunity. ESG is often grouped under the broader term sustainable investing, which includes impact and values-based investing as well as other investing styles that incorporate ESG issues to different degrees.
In general, sustainable investing focuses on how “sustainable” a venture is – by looking at how it affects society (e.g. how it treats its employees, the attention it pays to diversity and inclusion) the environment, and whether it displays best practice in corporate governance.
A common misconception about ESG investments is that they exchange returns for sustainability. In reality, investors with ESG funds can just as much about financial performance as environmental, social, and Governance issues. Company managers often argue that concentrating on ESG and sustainability leads to more growth and success long term. In this way, an ESG fund can lead to more positive returns than other types of investing.
What Specific Issues Constitute ESG?
While ESG involves three factors, not all funds respond to each aspect. For example, many ESG funds focus specifically on climate change, water conservation, and other environmental concerns. Most ESG investments that hone one issue choose the environment, but several are dedicated exclusively to social or governance interests, as well. Each aspect of ESG features criteria to help investors make decisions, including:
Environmental
These factors look at how a corporation manages its use of environmental resources. Besides guiding investment choices, analyzing these components can also help a business make changes and reduce its carbon footprint. Pollution and greenhouse gas emissions are two significant issues, but other ecological concerns may include:
- Deforestation
- Energy use
- Animal treatment
- Toxic waste management
- Efforts to curb climate change
- Environmental regulatory compliance
Social
Businesses do not operate in a vacuum—they have relationships with multiple stakeholders, including employees, customers, suppliers, and the community. Social factors evaluate how a company treats these groups. An investor may search for the following features when investigating the social impact of an organization:
- Does it have a diversity, equity, and inclusion (DEI) statement or commitment to upholding these values with hiring, marketing, and similar operations?
- What are the working conditions at offices and plants? Do they have adequate health and safety measures?
- Do its suppliers share the same interest in ESG?
- How does it treat customers? Does it take advantage of them to reap higher profits?
- How does it serve the community? Are employees encouraged to volunteer? Is a percentage of revenue donated to local charities?
Governance
Governance focuses on administrative aspects to ensure the business acts with transparency and integrity. Naturally, ESG investing verifies the company does not engage in illegal activities, but as a measure of how sustainable governance is, it also investigates:
- Conflicts of interest with executive boards
- Leadership diversity and structure
- Tax and accounting methods
- Accountability to shareholders
- Compensation for management
- Dishonest political tactics, such as bribery
What Are the Benefits of an ESG Fund?
The positive feeling that you direct investment dollars to support and encourage sustainable businesses is not the only advantage of an ESG fund. Sometimes, screening for ESG factors can lead to better investment performance. The following are some key benefits with ESG investments:
- Augment the number of businesses that act sustainably to gain investment for ESG funds
- Simplify risk assessment of different opportunities for investors
- Can enhance the company’s financial situation, which can lead to increased returns
Obtain ESG Guidance from the Hadary Team
If you need assistance with ESG investments, turn to the Hadary team of Moneta Group in Denver, Colorado. We can assess the funds you already have and determine how to integrate ESG into your existing portfolio. If you or your business has specific preferences, our process enables us to offer customized ESG-oriented solutions that may help meet your investment needs. On the other hand, we can help investors who prefer not to have ESG funds by monitoring businesses for sustainability developments.
At the Hadary team, we leverage the large-scale resources of our partnership with Moneta Group while providing the personalized service found only at an independent firm. We are fee-only fiduciaries, which means our clients’ needs and desires always come before our interests.
To learn more about ESG funds and our other advisory services, contact us to schedule an appointment.
© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information and opinions contained herein are subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
