“E.S. Whaaaat?” – The Basic Principles of ESG Investing

If you are like many of us, you may have heard the acronyms “ESG” or “SRI” pertaining to investing, but have not really understood what they mean. Environmental/Social/Governance and Socially Responsible Investing has been around for 50+ years, but has changed significantly in the past few years as the trend of ESG investing continues to grow. We thought we’d share some of the features surrounding ESG investing with you.  

While ESG investing refers, in general, to measuring and screening an investment’s environmental, social and corporate governance impact, it is more complex than just “screening out the bad guys” (tobacco, firearms, gambling, alcohol, etc.) Today, ESG investing principals have grown to include the direct engagement of money management firms with the companies they own in terms of proxy voting, direct dialogue with management, shareholder resolutions and public advocacy.

In general, the three broad categories of ESG investing are further broken down into more detailed categories:

 

  • Environmental:  Amongst others, these include reducing the negative impact of operations and practices on the environment, managing water scarcity and diminishing climate-related risks/carbon emissions

 

  • Social: This category includes issues such as how products and services are marketed (doing so in a fair and ethical manner), respecting human rights and culture in local communities, promoting diversity and gender equity across workplaces, demonstrating a commitment to employees and respecting the health and well being of consumers and users of products.

 

  • Corporate Governance: Corporate governance includes the responsible stewardship of capital, exhibiting accountable governance of boards, including environmental and social risk and impacts in financial disclosures, promoting ethical standards in all operations including with customers, regulators and business partners, and demonstrating transparency in communicating adverse events and controversies with the public.

 

The historical concept of selective investing is that it would automatically detract from performance. However, majority of research on the subject since the turn of this century says the opposite is true. In many instances, investing in individual companies and funds that display the above mentioned ESG characteristics can not only fit with an individual’s beliefs, but also provide the opportunity for healthy long-term returns.

We would welcome the opportunity to speak with you if you would like more information or would like to discuss ESG in further detail with us!