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What does ESG investing mean?

Thomas BalisJanuary 20, 2017

Investments

A client recently asked me, “What kind of socially responsible investment choices does HFA make available for clients?”  My initial response was something like, “What does socially responsible investing mean to you?”  While our blog from last summer on Socially Conscious Investing provided a nice introduction to the topic, I wanted to share a bit more on how HFA can turn these kinds of dialogues into reality.

Investors are more frequently expressing “concern about climate change, environmental issues, the ways companies treat their workers and corporate social responsibility”*.  In the investment management world, we refer to these concerns as environmental, social and governance, or ESG, issues.  Historically, interested investors have had little choice but to turn to a limited number of funds that explicitly had some kind of ‘sustainable’ or ‘responsible ‘ investment objectives.  While this may be appropriate for some clients, others may require more detailed, comprehensive approach.

Nowadays, firms like Sustainalytics provide ESG ratings and research for thousands of companies worldwide, empowering better analysis by our Investment Management Team at HFA.  By assessing ESG ratings data and Controversy assessments for the underlying companies held within a mutual fund, we can now compare how that fund stacks up against its peers with a Portfolio Sustainability Rating in Morningstar.

By leveraging these rankings, we can then select those funds from our preferred lists which rank most highly from an ESG standpoint when making adjustments to our clients’ portfolios.

So to answer the initial question,

  • For some clients, it may simply make sense to make one of the funds within their portfolio one with an ESG mandate.
  • For other clients, it may mean ensuring that we prioritize those funds on our preferred lists with the highest Portfolio Sustainability Ratings.
  • Finally, for clients who want to invest exclusively in this space, we’ve developed models using only holdings that are in the top 10% of the ESG ratings data.

In addition, our clients are not forced to choose between investment performance and sustainability concerns.  We have found many profitable ESG Funds still provide attractive returns.  Thus, clients do not have to give up performance to invest in ESG Funds.

If you have an interest or want to learn more, please contact our office.  We’re happy to answer questions or provide more detail.

*Source: Morningstar Manager Research, Feb 2016.