Market insights to aid in financial planning

Market Insights

By Eric Wymore CRPS©

ESG Investing: What does it mean and is it important. The flavor of the month or the future of investing?

First let’s start with a high level overview of what ESG investing means. ESG stands for Environmental, Social, and Governance. The Environmental portion takes into account climate change and risks, natural resource scarcity, pollution and deforestation. The Social portion includes labor issues, data security, liability risks, employee relations, health and safety. The Governance theme encompasses board of directors’ diversity, executive compensation, public policy, business ethics and board effectiveness.

Past vs. Present.

Years ago, if an investor wanted to have a “values” based investment strategy, they were limited to only a few options. According to Morningstar, prior to 2016 there were only 5 investment style categories to invest. By the end of 2017, Morningstar had 16 categories. The “old” version of socially responsible investing was to avoid exposure to certain companies or industries. Investors would often sacrifice portfolio performance for values investing. The ESG style of investing is more inclusive. ESG investing looks beyond the financial statements of a company. What are the companies that are aligned with certain behaviors and activities that can produce similar outcomes? What are the intangibles of a company that could potentially increase their brand reputation and value? Or maybe even more important is what is the company management doing that could negatively affect the company’s value?

Millennials and Women are Leading the Charge.

A recent survey conducted by Nuveen Investments continue to show that millennials and women want their investments to have a positive impact on society. Millennials have also stated they want to work for an employer that makes a positive social and environmental impact on the world. An additional factor that business are becoming more aware of is that Millennials prefer to shop for brands that have an environmentally sustainable business practices. Millennials will be turning 40 years old soon, they do and will continue to be have a substantial impact on our economy.

What does it mean for me?

First of all, ESG investing does not eliminate risk. Investors in ESG portfolios will still experience the ups and downs of the market. Yet it is encouraging that investors may not have to sacrifice returns for investing in their values. ESG is no longer a niche market and is becoming a larger part of investors’ portfolios. As more and more investors’ are placing money with ESG style investments, companies will take notice and could possibly change their business practices.

In my humble opinion, ESG will continue to make a large impact on the way companies conduct business in the future. There is no way to predict the future but I believe portfolio managers will begin to look beyond the financial statements of a company as they decided how to invest the portfolio’s assets.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All investing involves risk including loss of principal.

Contact Eric at eric.wymore@metcalfpartners.com