Socially Responsible Investing
» Article by Travis Martin, Client Service Specialist | Featured in the April 2020 edition of The Rational Optimist
The general interest in environmental, social, and governance focused (ESG) investing has recently increased in popularity. ESG investing, sometimes referred to as “socially responsible investing” (SRI) strategies, are used to evaluate the sustainability and responsibility of public companies, as well as their societal impact.
Elements that ESG covers include non-traditional topics used in financial analysis. Examples of this are consideration of how corporations respond to climate change, policy regarding water management, health and safety programs, treatment of employees, disposal of hazardous waste, management of toxic emissions, compliance with government environmental regulation, and overall corporate culture.
Many people believe that ESG investing has matured to the point where it can significantly accelerate market transformation for the better. As corporations and investors experience growing influence and power, their actions and decisions progressively shape the future.
“As corporations and investors experience growing influence and power, their actions and decisions progressively shape the future.”
In recent years, several noteworthy publicly traded companies across the globe have said they are implementing a form of ESG criteria. Additionally, several large fund managers said they are using a form of ESG factoring to screen and identify investments.
In January, Larry Fink, CEO of BlackRock, the world’s largest asset manager, with over $7 trillion in assets under management, declared that BlackRock would use its voice to push for more meaningful company disclosures on sustainability. While they are not the first firm to use its influence to encourage more well-rounded and thoughtful corporate behavior, we should not overlook the significance of their statement.
Derek Horstmeyer, an associate professor of finance at George Mason University, emphasized this in asserting, “As the largest manager of money out there, especially retail money, this is an important step.” Going forward, as we monitor prospective leaders in ESG ratings, companies have begun implementing methods for optimal integration of ESG information evaluation.
Yahoo Finance, a prevalent web page for investment resources, adopted a “sustainability” tab to its stock quotes pages in 2018. A web-based rating system that is enabling users to assess potentially significant ESG risks and opportunities, MSCI, rates companies on a ‘AAA to CCC’ scale, and how well they manage those risks relative to their peers.
It is unclear who the industry-standard leader for ESG ratings will be down the road. Data is increasingly important to identify well-positioned companies for the future. Looking closely at the data can also reveal warnings for companies that are likely to underperform or fail.
An index is a set of securities intended to represent a specific market or strategy. Indexes are constructed and maintained with guidelines that ensure that security selection is objective and consistent.
ESG indexes are no different and will continue to evolve and are used in the same manner as traditional indexes, such as benchmarks for investment policy, asset allocation plans, passive funds, and performance measurement, as well as universes for active funds.
Once some baseline methodologies are established and accepted, it will be interesting to see what will become the Moody’s or S&P of the ESG index. Offering the additional benefits of transparency, configuration, and cost-effectiveness, indexing within ESG will continue to play an essential role in directing sustainable investing into the mainstream.
Infographic from Forbes.com – The Remarkable Rise of ESG by Georg Kell