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Debunking the Myths of ESG Investing

L Haelen 2016
Laurie Haelen, AIF®
Senior Vice President, Manager of Investment and Financial Planning Solutions
[email protected]
(585) 419-0670 x41970

Published in the June issue of Rochester Woman Magazine

I was brought up in a family of modest means by parents who counted on Social Security and a small pension for their retirement. The stock market was a mysterious entity and my parents considered the market as legalized gambling created for, and used by, those who circumvented an honest living. They were not alone in their mistrust of the stock markets, which is a perception still exists today: 65% of respondents in a recent survey* indicated they “mistrust a lot” or “mistrust a little” the financial services industry. Only 2% of respondents said they trust the financial services industry “a lot” and nearly 83% said they believe their interests are secondary to corporate profits. Yet traditional pensions have gone by the wayside, and most of us will need to rely on our own savings to fund at least part of our retirement. If only there were a way to invest in companies that treat employees well, care about the environment and are financially prudent. If you could invest cost effectively and achieve returns that compete with some of the most successful managers. This may seem altruistic and, hence, too good to be true. Welcome to the ever-evolving world of ESG investing.

ESG investing is an investment strategy that utilizes Environmental, Social and Governance factors of companies—in addition to traditional investment selection criteria—to determine if they are a good investment. In other words, the companies chosen must adhere to one—or ideally all—of the standards to be chosen as a candidate for a mutual fund or stock portfolio. In the past, such portfolios or funds were considered as faddish and only attractive to people who were willing to sacrifice returns for the greater good. Now, not only can one achieve competitive performance with an ESG strategy, but there is growing evidence to suggest that longer-term performance of ESG strategies may exceed lower quality investments. Why? Simply put, the implications of poor corporate governance and disregard for the environment, employees or local communities are likely to undermine a company’s long-term performance. In fact, as you can see from the chart below, ESG investments have performed mostly in line with—and sometimes better than—the common benchmark ACWI (All Country World Index) for the better part of the past decade.


*Source: Blackrock Investment Institute

Another common myth regarding ESG is that it is difficult for investors to achieve adequate diversification and therefore they will miss out on the proven long-term benefits of a well- diversified portfolio. When I first began to construct ESG portfolios, due to my desire to support socially responsible companies, there were indeed limited choices in areas such as emerging markets, small cap and fixed income funds. Now, with over 23 trillion* (Source: Morningstar) invested globally in ESG strategies, there are viable options across all commonly available asset classes for ESG investors. In addition to available asset classes, ESG is offered by many of the most prestigious mutual fund companies and asset managers and can be tailored to suit your specific needs. Don’t like fossil fuels? There is a fund out there that can accommodate your desire to invest without buying energy stocks. There are even funds out there that only invest in companies led by women. The variety of ESG strategies available today empowers investors by allowing them to put their dollars where they feel they will do the most good—not just continuing to invest in companies that may not have investors’ best interests at heart.

One of the questions many people ask is: how do you know if a company meets the criteria to be called ESG? The screening process for ESG has been streamlined over the years, and now companies such as MSCI (Morgan Stanley Capital Index) and Morningstar provide comprehensive screening tools that are updated on a regular basis. In addition, companies like Fidelity and Schwab are posting ESG ratings on their websites to make it easy for prospective investors to find suitable ESG companies, EFTS and mutual funds. The number of screening systems have grown in line with the substantial growth of ESG over the past decade, so now it is easier than ever to get up to date information.

A final misconception common to ESG investing is that there is a significantly higher cost to the investor who chooses an ESG strategy. The truth is, the cost of a well-diversified ESG portfolio is only slightly more expensive than a non-ESG portfolio utilizing mutual funds or ETFS (exchange traded funds). It can be a bit more complicated for individual investors to build an ESG portfolio, though, and having an advisor assist may add in some costs but would also ensure you get the financial planning to help you design the best portfolio to meet your goals. There are now more options than ever for ESG-oriented investors to have their portfolios match their personal passions, and it is very likely that this style of investing will continue to gain popularity as the $12 trillion dollars of wealth pass from Baby Boomers to Millennials. Over 86% of Millennials and over 75% of women consider ethical factors important when choosing investments. * (source: Morgan Stanley 2018) As choices grow, expenses tend to decline and make the choice of ESG investing even more attractive.

Perhaps the increase in accountability for companies worldwide will begin to rebuild trust in the financial services industry for investors. Thanks to the rise of ESG, there are many more options for investors to match their investment portfolios with their values.

To see this article in Rochester Woman Magazine, click here.

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