Is ESG investing for me? What is important for me to know?
Values aligned investing has long been a way for consumers to invest in what is important to them. It is common to hear impact investing, ESG investing, or sustainable investing used interchangeably. These approaches to investing are made with the intention of generating positive and measurable social and environmental impact as well as financial return for investors.
What is important for investors to know? As you might imagine, there is extensive information available for investors to learn about ESG investing. We have compiled a few of the most common questions and a list of resources at the end for those of you who want more!
Frequently Asked Questions about ESG Investing
What is ESG Investing?
ESG Investing is a way to incorporate personal values into investing. Investors seek a financial return while also contributing to environmental and social solutions. The industry is growing rapidly as consumers demand more from governments and businesses. ESG is an acronym for Environment, Social and Corporate Governance.
Since 2018, investment dollars into ESG strategies have grown by 42% and the USSIF, the Forum for Responsible and Sustainable Investment, estimates more than $17 billion are invested in sustainable strategies. Currently 1 in 3 dollars of all assets under management are investing in sustainable funds*. From a consumer perspective, Millennials lead the way when it comes to sustainable investing, then Gen-Xers and, finally, Baby Boomers.
There are many ways to invest responsibly including grants, debt, and cash contributions as well as through public and private equity. The Global Impact Investing Network is an excellent resource dedicated to increasing the scale and effectiveness of impact investing around the world. It is also a great resource to gain more knowledge about impact investing and offers research, case studies, and white papers.
Last month we shared a short video with you that illustrates sustainable development goals (SDGs) adopted by the United Nations and as such used widely in the ESG industry. Because there are so many different categories within ESG and impact investing, the Stockholm Resilience Center proposed a thoughtful way to organize the top 17 sustainable development goals (SDGs) into three layers. Effectively, the environment is the foundation that supports society, which can then effectively develop and sustain the economy.
Environmental goals include
Societal goals include
Economic Goals include
Are the returns commensurate with non -ESG funds?
Investors invest for several reasons, including a return on investment. Historically, it was thought that investment performance of sustainable funds lagged that of peer traditional funds. In recent studies from Morningstar, as well as Morgan Stanley, that is not necessarily the case. In 2020 US sustainable equity funds outperformed traditional peer funds by a median of 4.3 percentage points - the largest difference in performance recorded since 2004. (And like all investing, past performance is not a guarantee of future results.)
In addition, studies conclude that companies with sustainable goals operate more efficiently and are more profitable than companies without them.
What will ESG investing accomplish?
The intention of ESG investments is to make the world a better, cleaner, more sustainable place for us and future generations. Most stakeholders would like to see the efforts listed above become a reality in our lifetime. Investing in companies that thoughtfully govern, generate revenue, use resources wisely, and operate in an environmentally friendly way is part of the solution. Our ability to hold public companies accountable is meaningful. Not only do we become shareholders, we also can become activist shareholders and work within activist groups to encourage further change in a company.
What are the challenges facing impact or sustainable investing?
ESG investing in public equity is regulated like any other public investment vehicle. ESG mutual funds are subject to SEC and FINRA oversight and are regulated by The Investment Company Act of 1940, The Securities Act of 1933 and The Securities Exchange Act of 1934. The challenge is the impact measurement itself. Currently, each mutual fund company offering ESG funds provides their own standards, measurement, and oversight for impact measurement. The same is true of individual companies participating in sustainability and governance efforts. Efforts vary widely across firms and it is the investor who needs to decide whether the investment meets their standards. We suspect this will change over time and the measurements will become more standardized.
In addition, there is the risk of greenwashing. The term greenwashing comes from whitewashing. It is disinformation perpetuated by a company in order to appear sustainable for profit or business motives.
Tools for measuring ESG funds
Fortunately, there are several tools available for consumers and advisors to check fund and company ESG ratings. These tools are provided by reputable companies, as well as non-profit organizations. Our top 3 favorites are:
Is ESG investing right for me?
Determining if ESG investing is right for you is a decision you will make based on your values and investing goals. It is important to note that ESG investing is not market investing, but rather active management. Mosaic Fi supports ESG investing for clients whose values are aligned with ESG investing. We encourage open conversations with our clients and will often recommend ESG funds as alternatives to other traditional funds as part of an asset allocation when it is appropriate.
If you have questions, please share them with us.