For some time, investors have been using their investment dollars to try to make a change in the world. One option is to focus on green investing, where the emphasis is avoiding environmentally dangerous companies and instead investing in those with greater sustainability efforts. Other areas where advisors can focus on making an impact are values-based issues, like tobacco, weapons or gambling. Because of this demand, firms have developed guidelines for investment products that are now labeled Environmental, Social and Governance or ESG.
As a group, these investments are in some way conscious of the underlying effects a given company has on the environment, how the company interacts with society at large, including its own labor force, how transparent the company is with investors, and how investor friendly the company’s governance structure is. Many people are intrigued by putting their investment dollars to work for the greater good, but there are still some persisting misconceptions about responsible investing.
Do ESG Investments Result in Lower Returns?
First, every portfolio should be constructed to a given client’s needs. Not every client’s portfolio should be compared to broad market benchmarks. However, assuming a client’s portfolio was appropriately compared to the broad market indices, there have been numerous studies suggesting that overall performance has been much closer to benchmarks over recent years compared to 20 years ago. Some studies even show better performance from companies that emphasize strong environmental, societal and governmental policies.
Are Costs Higher?
As interest in ESG has grown, there has been an enormous expansion in the number and variety of mutual funds and exchange-traded funds (ETFs) across the spectrum. Of course costs vary between all investments, but with research you can them limit accordingly.
How Limited Are Investment Choices?
The ESG industry has evolved over the years. Given the popularity, each year more and more investments are launched. There are more than enough investment options, both old and new, to comprise a portfolio. While there are many benefits to investing in an ESG portfolio, one cannot lose site of the overall risks of investing in any portfolio. Investors run the same risks as they do with other investments and there are no guarantees against losses, especially in a declining market. A customized ESG portfolio based upon your individual views, investment goals, risk tolerance and liquidity needs, will allow you to find an appropriate balance between risks and reward.
Choosing ESG Investments
As different causes are important to different people, matching those criteria is of vital importance. Some investors choose to do their own research and there is plenty of material written on this topic. Some choose to work with investment managers who specialize in this area. There are many avenues an investor can take to create a portfolio which aligns with their personal values.
Like any investment, investors need to understand the risks and rewards of ESG investing and tailor choices to suit their portfolio.