Environmental, Social, and Governance (ESG) investing is an investment process that takes into consideration environmental, social, and governance factors, in addition to typical financial and economic considerations, when making investment decisions.
What is Environmental, Social, and Governance (ESG) Investing?
Environmental, Social, and Governance (ESG) investing is an investment process that takes into consideration environmental, social, and governance factors, in addition to typical financial and economic considerations, when making investment decisions. Below are some examples of common ESG issues and factors that investors can consider:
|ENVIRONMENTAL FACTORS||SOCIAL FACTORS||GOVERNANCE FACTORS|
|Greenhouse Gas Emissions||Public Health||Board Diversity|
|Natural Resource Conservation||Labor Relations||Executive Compensation|
|Pollution||Human Rights||Shareholder Voting Rights|
|Waste Management||Armed Conflict||Internal Controls|
Why ESG Investing?
ESG investing argues the notion that a company’s impact on the environment, its impact on society, and the governance structure by which it is run significantly affect the company’s profitability and sustainability. Investors around the world, both individuals and institutions, have increasingly implemented ESG evaluation into how they search for investment opportunities, believing that it is integral to evaluating the companies they invest in and the return they can receive.
Many investors also want to use their power as capital allocators to influence corporate behavior and industry trends. With the advent of social media and greater global connectivity, there has been much greater awareness of problems around the world and in society, and how companies and industries impact those issues. Investors large and small now understand that they can try to effect change by directing their money to a desired outcome through companies that practice responsible stewardship relative to ESG issues.
The popularity of ESG investments has grown tremendously since its origins. Assets invested with an ESG mandate recently reached over $12 trillion in the United States1, accounting for more than 25% of the total U.S. market.
ESG investing was heavily bolstered in 2004 when the United Nations organized financial management institutions to seek out ways to integrate ESG consciousness into capital markets, in an attempt to help alleviate those ESG problems that impact the globe. As a result, the U.N. developed the Principles of Responsible Investing, which asset managers can now declare their adherence to, committing to specific guidelines around how to appropriately and efficiently integrate ESG into their investment processes and way of doing business.2
ESG investing and its variants are known by many names. Here are some other synonymous names you may hear it be referred to as:
- Socially Responsible Investing
- Values-Based Investing
- Sustainable Investing
- Impact Investing
- Responsible Investing
Approaches to ESG Investing
There are many ways to approach ESG investing, and indeed many investment managers incorporate one or more of these methodologies into their ESG process:
Screening for companies that have a strong performance record on ESG issues and avoiding those that do not
Seeking companies that are currently not ESG best-in-class companies, but show promise, with the hope of engaging with them and improving their ESG impact
Emphasizing a thematic concept, like renewable energy or women’s empowerment
Excluding certain industries or products from their portfolio deemed to be damaging on an ESG basis, potentially on moral or religious grounds
ESG Investing and Returns
Initially, the popular conception was that if you wanted to do right by considering ESG issues or promoting sustainability, you inevitably should expect lower returns than the average investor.
However, numerous studies from many well-known financial institutions now suggest that investors do not have to sacrifice, and can even improve, returns when incorporating ESG considerations into their investment process.
Here are a few organizations that performed such research and their findings.
- Has ESG Affected Stock Performance?
- A Quantitative Perspective of How ESG Can Enhance Your Portfolio
- Barclays – The Positive Impact of ESG Investing on Bond Performance
- Credit Suisse – Finding Alpha in ESG
- Harvard Business School – Corporate Sustainability: First Evidence on Materiality
Working with Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs, which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.