Two Steps to Get Started on Aligning Your Money with Your Values
Are you familiar with ESG Investing? It’s a trending investment philosophy that combines two goals: positive investment returns and positive impact on society, environment, or business performance. It falls under the larger umbrella of “sustainable investing” but ESG specifically stands for Environmental, Social and Governance investing. These are the three central factors ESG investors use when measuring the sustainability of stocks in their portfolios – and determining whether their investments support their values.
Why Isn’t Every Investor Choosing ESG?
Aligning your investments with your values seems like an ideal scenario. So, why isn’t everyone doing it? Well, a common criticism of ESG investing is that investors can’t truly make money using these measures to choose investments – or at least not as much money as could be made using a more traditional investment philosophy based on dollars and cents. However, this is a misconception. In fact, Morgan Stanley’s Sustainable Reality survey, which analyzed the performance of 11,000 mutual funds from 2004-2018, concluded that sustainable funds were similar in performance to comparable traditional funds. Specifically, the survey did not detect any statistically significant difference in total returns. What’s more, Morgan Stanley also noted that sustainable funds may actually offer investors lower market risk, as these funds experienced a downside deviation that was 20 percent smaller than the traditional funds analyzed.
So, how does an investor get started in implementing an ESG philosophy? Below we’ll examine two important topics: advisor selection and investment screening.
Advisor Selection: Finding the Right Professional to Help You Implement Your Philosophy
A significant hurdle for many investors interested in ESG investing is finding a financial advisor who supports such a strategy. The unfortunate truth is that many advisors believe the misconception that ESG funds don’t perform as well as more traditional funds. If ESG investing is important to you, you’ll want to interview multiple financial advisors and ask them pointedly about their feelings on ESG investing. Even if they express positive views, you should still determine whether they are knowledgeable about this type of investing.
SEE ALSO: Are Your Investment Decisions Making the World a Better Place?
Here are three questions to get you started:
- Do you believe that ESG investing means I’ll have to compromise on the strength of my returns?
Remember, you’re looking for an advisor who both supports ESG investing, and who knows the data from the Morgan Stanley survey mentioned above, indicating no substantial difference in returns.
- How do you recommend getting started with aligning my investments with my values?
Before an advisor can help you invest in your values, they need to understand what your values are. They should have a process in place for assisting you in identifying them specifically enough to choose investments that suit your needs. They should also explain how they’ll help you identify the right companies to invest in.
- If I develop an ESG portfolio, will you be able to show me my impact performance?
Years ago, when sustainability investing was a more “fringe” interest among investors, it was difficult to find reliable ways to measure an investor’s impact. Today, with the prevalence of investors interested in ESG, there are a variety of resources financial advisors can use to demonstrate your impact performance. While there is still more work to be done in fine-tuning these measures, you’re looking for an advisor who is knowledgeable about existing resources and willing to help you determine your impact.
Asking these questions, and any others that are important to you will help you determine which financial advisor will best meet your needs. In addition to listening closely to their answers to the three questions above, watch for red flags such as attempts to steer the conversation away from ESG or an unwillingness to provide in-depth answers.
Investment Screening: Agreeing on a Methodology for Choosing Investments
Once you’ve found a supportive and knowledgeable financial advisor, you’ll need to determine a methodology that both you and your advisor agree on – and understand to mean the same thing. When discussing values-based investing, there is a multitude of terminology both you and your advisor might use. Terms like ESG investing, socially responsible investing, sustainability investing, impact investing, and justice investing are all common, but they may not mean the same things to all people. This means it’s crucial not to make assumptions. So, an important step is for you and your advisor to be sure you’re talking about the same thing.
Once you’re on the same page, you and your advisor can begin getting specific about how you’ll measure potential investments to determine whether they’re the right fit for you. Let’s say, for example, you’re an ESG investor interested in companies with strong gender equality policies. You and your advisor may want to utilize one or more of the many companies that offer values-based investment research. Popular options include Calvert, MSCI, As You Sow, OpenInvest, YourStake, and Morningstar’s Sustainability Ratings. These sources allow you to screen potential investments and see their “grades” in specific areas.
A note on the frustration many ESG investors encounter: it can become a bit maddening that funds can be evaluated quite highly in one category that is important to you, yet receive a poor grade in another measure that is meaningful to you. For instance, you could find companies scoring fantastic marks for gender equality yet receiving failing grades for fossil fuel emissions. It’s important to recognize upfront that you may not be able to perfectly align your values with your investments and that you’ll likely need to prioritize which value measure you focus on.
SEE ALSO: Seven Steps to Finding the Best Financial Advisor
ESG Investing and Risk Mitigation
ESG investors want to benefit the greater good while also seeing suitable investment returns, and one way that ESG investing accomplishes those goals is by minimizing risk. While no company can fully protect itself against something completely unexpected, like a pandemic, there are a host of internal issues that they can control. Environmental mishaps, unhappy female employees, or taking advantage of customers are all bad for business – and bad for investment returns. Companies that are focused on Environmental, Social, and Governance factors are inherently mitigating the risks of brand damage or bad publicity in areas such as these, adding an additional safeguard against poor investment returns.
Final Thoughts – and a Word of Caution – ESG Investing
The strategy of aligning your money with your values is on the rise because it pairs benefits for the greater good with financial benefits for investors, too. Though much is misunderstood about the financial performance of ESG investments, financial advisors who are educating themselves about this trend know that the data indicates performance on par with traditional investments – with the added benefit of built-in risk mitigation, too.
Interested investors need to be cautious, however, about jumping in with eyes closed. Such investors need to be aware that ESG has had the wind at its back for the last decade as the fossil fuel industry has struggled and technology companies, ESG favorites, have soared. This has inherently led ESG portfolios to outperform. Moreover, some consider that certain ESG sectors such as renewable energy and electric car companies have become over-valued. So, you need to tiptoe into the waters with knowledge and caution. And realize that in so doing, you must be committed to this style of investing, for reasons other than traditional investment performance metrics.
If you’re interested in learning more about ESG investing or getting started with this strategy, please reach out today. At WellAcre, we believe in combining a global perspective and a personal approach to construct a portfolio suited to your unique goals, needs, and risk attitude. We look forward to hearing from you!