Environmental, Social, & Governance (ESG) Investment Strategies

Do well by doing good.

What is an ESG Investment Strategy?

Environmental, social, and corporate governance (ESG) investment strategies are built to align an investor's portfolio strategy with their personal values.

While ESG is generally focused on the well-being of society at large, investment strategies following an ESG blueprint consider both financial returns and societal well-being.

In order to qualify as an ESG investment, a security must successfully pass a screening process that assigns a score across the three ESG dimensions.

The ESG Screening Process

An ESG investment is scored across three criteria: environmental sensitivity, social awareness, and solid corporate governance. An investment will receive a total ESG score, which is the sum of the scores from each area.

The ESG score can differ depending on which agency or analyst is scoring the security, and there is no central authority for assigning and regulating ESG scores.

Different advisors may also use proprietary metrics for scoring ESG investments. For example, we use our own ESG screening process, which is a combination of both agency/analyst ranking and our own grading system.

Examples of ESG Criteria

ESG investments are scored across environmental, social, and corporate governance criteria. Below are some examples of criteria a security must meet in order to qualify as an ESG investment:

Environmental Criteria:

  • How well does this company manage their greenhouse emissions?
  • How sustainable are the company's products?
  • How efficiently does this company use natural resources?

Social Criteria:

  • What community development initiatives does this company participate in?
  • How integrated are diversity, gender equality, and equal opportunity employment in this company's hiring process?
  • How does this company prioritize human rights?

Corporate Governance Criteria:

  • How reasonable is the company's executive pay?
  • How diverse is the company's Board of Directors?
  • How responsive is this company to its shareholders?

Performance Characteristics of ESG Investments

While still a fairly new concept to investing, there is a growing body of research looking to quantify an ESG investment's performance relative to the broader market. Some researchers claim ESG investments outperform the market, while others are not so certain. The research is mixed.

On the risk side, ESG investing can help minimize company risk, or the risk that is directly attributable to the actions of a company. Ethics and morality are cornerstones of ESG investing, and a company that sets high ethical expectations for itself is less likely to cause losses to shareholders through unethical practices.

Below are qualitative analyses of the investment performance and characteristics of ESG investments:

Investment Performance

Given ESG investing's status as a newcomer in the markets (compared to stocks or mutual funds), there is not enough data to make long-term historical predictions regarding an ESG's performance relative to the overall market.

The current research indicates an ESG investment's performance is about on-pace with the S&P 500's annual return.

Risk Characteristics

In evaluating risk in a security or market, the standard deviation (or sigma) of the investment is its amount of risk. The current research indicates that the standard deviation of ESG investments is less than the overall market's.

For an investor looking to diversify away from risk, an ESG section of their portfolio could help them achieve the diversification they're looking for.

How We Build ESG Strategies for Investors

An investor's ideal portfolio reflects all of their goals and objectives in its investments. For an investor who values ESG efforts, adding an allocation to ESG investments may work in their best interests.

When we build an ESG portfolio for a client, our focus is on matching their values to the values of the ESG strategy. Our process for building customized ESG investment strategies for our clients is outlined below.

1. Understanding the Investor's Values & Objectives

Building a successful investment strategy starts with the advisor understanding a client's needs, goals, and objectives.

In the case of ESG, discussing their ESG preferences is the first step in creating a portfolio aligned with their values.

2. Screening Investments for ESG Fit

After understanding a client's goals and objectives, we use their stated ESG preferences to screen the potential investments that may end up as recommendations for the investment portfolio.

We use a combination of analyst research, agency ratings, and our own ESG screen to determine which investments best fit the client's objectives.

3. Implementing the Customized ESG Portfolio

After the investments have been screened, the securities that best match the client's goals and objectives are presented to the client in the form of a proposed portfolio allocation for their approval.

If the client is happy with their new portfolio, the advisor begins a transition of their current portfolio to an ESG-based one (tax consequences considered). If the client's feedback indicates changes are in order, the advisor will refine and tailor the proposal to better fit the client's goals.

Wondering What Your ESG Portfolio Would Look Like?

If you are interested in seeing what a customized ESG portfolio would look like based on your goals, you can use the contact form here to reach out to an advisor.

After an initial call, your advisor will create a proposed portfolio for your evaluation.

If you have any other questions regarding an ESG strategy, you can use the phone number provided to connect with an advisor directly.