What is ESG Investing and Does It Make Financial Sense?

Corporations in America are aware that public perception is important. That’s why many companies have made strides in recent years to emphasize their efforts in caring for the environment, providing equal opportunities to employees, and being active contributors to small communities. It’s PR 101 for building trust and goodwill towards a brand, which can ultimately help drive sales.

But research shows it can drive investment decision-making. Through what is known as “impact investing” or ESG investing (explained below), investors have shown increased interest in buying companies that have the potential to combine both social and financial returns. There is not a one-size-fits-all approach to social impact investing – every investor may have different criteria for what they are looking for in a company. But generally speaking, ESG investing falls into three branches:

• Environmental Criteria – some investors may just outright avoid energy companies that deal in non-renewable resources, like oil and natural gas. But some investors just want the companies they own to take an interest in sustainable processes, or to give back to environmental causes.

• Social Criteria – here an investor may examine how a corporation treats their employees (pay grade, health benefits, etc…), and also how they interact with the local communities where they operate.

• Governance Criteria – this criterion deals with the leadership structure within a corporation, which could include makeup of the board, gender diversity amongst executives, and shareholder rights.¹

Can Social Impact Investing Also Boost Returns?

Research suggests that higher returns are possible amongst companies that embrace sustainability practices. According to a 2014 research study conducted by the firm CDP, “corporations that are actively managing and planning for climate change (one of the issue areas that ESG considers) achieve an 18% higher return on investment (ROI) than companies that aren’t planning for climate change, and 67% higher than companies who refuse to disclose their emissions.”¹ A higher return on investment (ROI) may also lead to a higher return on the stock, but it is by no means a given.

There have been other cases in history where the ESG approach could have meant missing out on significant returns. The most obvious example is the tobacco industry and cigarettes. From a health standpoint, cigarettes have been established as a hazard. But at the same time, the tobacco industry created the best stock returns of any industry from 1900 – 2010.² The overarching message to investors is that it can go both ways, and taking a stance to invest for social impact is more of a personal choice than one that aims specifically to boost returns. But in many cases, investors can do both.

Make Your Investments Matter in a Totally New Way

Would you like to know if your investments match your ethics? When was the last time you checked to see if your portfolio has a social screening? Are you concerned that socially responsible investing could hurt your long-term investments?

If you’re curious to learn more about what socially responsible investing could mean for your investment portfolios, the Wealth Managers at WrapManager can help.

Whether you’re interested in better understanding why someone would be interested in sustainable investing, or understanding why your ESG Mutual Funds aren’t particularly transparent, one of our Wealth Managers can serve as a sounding board for your ideas in addition to working with you to customize your portfolio so that your investments appropriately align with your interests. Learn more now by calling 1-800-541-7774 or by dropping a line to wealth@wrapmanager.com.

Sources:

1. Forbes

2. Motley Fool