What’s in Your ESG? (Part 1)

When it comes to socially responsible investing or what is now being widely adopted as ESG – Environmental, Social and Governance, ask yourself if you really care about all of these categories equally? The methodology that almost all ESG evaluators use to identify and score, or rate, potential ESG investments generally relies on averages within each of these components.

Scoring is useful if you care about overall adherence to ESG but this may not mean what you think it does.

So far, the investment community has decided investors need to be interested in all these things if you want to invest in a sustainable way. Be aware though that ESG standards alone do not necessarily reflect specific values or concerns, or what we refer to as areas of concern. And good luck trying to find a filtering system that can. At least for now that data is mostly available at an institutional level.

This becomes an interesting conversation when deciding on which investment approach you should choose. Are you looking for an average representation of all three E, S and G? Or are you primarily concerned about specific areas such as global warming, controversial weapons, or gender issues? Defining the values you wish to include in your investment strategy can result in many different approaches.

For decades the rivers that fed socially responsible investing were well stocked with an adequate array of investments considered to be socially responsible, mostly in the mutual fund world. Well known firms such as Calvert, MSCI, Ariel and TIAA were known for this. Today the bulk of ESG investing seems to be toward passively managed socially responsible index funds from firms such as Vanguard, T. Rowe Price and JP Morgan, with more and more coming out each day.

No doubt the decision to pursue socially responsible investing is a very personal one. You may have decided that you would even allow for a slightly lower return or increase in volatility – which by the way is most definitely not a given. Kiplinger cites Morningstar analyst David Kathman who says that “There is no evidence that shows ESG or socially responsible investing helps or hurts performance.” “Over the long term, it probably evens out,” he added.

Perhaps at this point you have already found one of the many socially responsible ETF’s or mutual funds available to investors- well done, you did it!

Well…maybe, not so much. It turns out that it is much more complicated than that.

Consider that of the tens of thousands of mutual funds and ETF investments available in the marketplace, roughly only 25% would receive an “above average or better” rating from the ESG rating firms. That’s still a tremendous amount of options for a socially responsible investor to choose from. How can you go wrong?

However, if for example you didn’t want your money to support controversial weapons, tobacco or animal testing you’d be surprised to find that a majority of these supposedly highly filtered ESG funds and ETF’s do have significant exposure to these activities. Just because one does not want to support these activities it doesn’t mean that they aren’t acceptable to the ESG rating companies.

In part 2 of What’s in your ESG? we’ll take a deeper dive into ESG certification and standards.

Special thanks to Saad Tahir for providing critical research for this article.

1. Kiplinger 7 Great Socially Responsible Mutual Funds


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