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Making money while giving a darn? Consider ESG investing.


Do values and returns have to be mutually exclusive when it comes to your portfolio? ESG investing is a rapidly growing investment approach that considers values-oriented factors as part of the investment process. ESG stands for “environmental, social and governance” - ESG investors consider the impact, both positive and negative, that corporations are having on our environment and our society, as well as how they conduct themselves from a governance standpoint. The following are some examples of ESG factors for publicly traded companies:


· Environmental factors - climate change policies, natural resource and land use, hazardous materials and waste management, greenhouse gas emissions goals, and carbon footprint

· Social factors - employee treatment and benefits, diversity and inclusion in hiring and advancement, ethical supply chain sourcing, and local community impact

· Governance factors - board diversity and independence, ethical business practices, history of shareholder lawsuits, and fair pay for executives vs. employees


The historical predecessor of ESG investing is socially responsible investing (SRI), which encompasses such buzz words as “shareholder activism” and “impact investing”. While SRI takes an exclusionary approach to investing, for example, by eschewing entire industries like tobacco and gambling, ESG actively targets companies that have performed admirably across the relevant factors outlined above. It’s important to note that ESG integrates traditional securities analysis with assessment of a broad set of non-financial issues that affect company valuations.


But can you still make money investing this way? Before you decide to stick with making a difference by riding your electric scooter to work while drinking from your S’well bottle, consider the following:

· There is a growing body of evidence that ESG investing doesn’t mean sacrificing returns, with some industry analysts suggesting that companies paying attention to such factors may even outperform in the long run. This makes sense in part because high ESG typically means strong management, and strong management drives company growth and profitability.

· ESG investing may reduce risk as companies that hold themselves to rigorous standards in areas like worker treatment and climate-change policies are likely to have better operational performance while avoiding lawsuits. Recent example in the news – PG&E, which filed for bankruptcy due to liability in California’s spate of wildfires in recent years.

· Corporate transparency is on the rise, which, coupled with new technology that can help gather and process non-traditional data, supports the effectiveness of ESG- focused mutual funds. According to a report by Morningstar, there were 351 such funds with assets of ~$161 billion by the end of 2018.


In conclusion, if you are concerned about our global legacy but are not ready to trade your Chevy Tahoe in for a Prius or your dryer for a couple of clotheslines in the front yard, you should consider incorporating ESG investing into your portfolio. It might just be an excellent complement to your S’well bottle…


To learn more about aligning your investing with your values, feel free to send your questions to allison@insightfiduciary.com.

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