By Hallie Kraus, CFP®, CRPC®
We’ve discussed how ESG investing can motivate the corporate world to make positive change and have acknowledged the complexity of the investment decisions that are being made within ESG funds. Another complex aspect of ESG investing is that different financial firms adopt different investment strategies that are suited to their clients’ needs. It’s time for us to share our take on it!
How We Approach ESG Investing Within Your Portfolio
The Humphreys Group has invested in ESG mutual funds for 20+ years, and such funds currently make up about 15% of our clients’ assets. We have worked closely with industry leaders like Impax Asset Management and Parnassus Investments as well as newer entrants, such as Dimensional Fund Advisors, who are interpreting ESG in new, interesting, and valid ways. Our approach to ESG investing has evolved as has the industry, as the “opportunity set” has expanded as a wider range of funds has been made available, as the evaluation process has become more nuanced, and as the false choice between performance and social impact has been debunked.
All of this has led us to a robust process for implementing ESG investment strategies within your portfolio. First, we’ll ask you to complete an ESG questionnaire. This identifies what issues are most important for you — for many, it’s the environment, for others, it’s gender diversity, while others may focus on avoiding for-profit prisons or weapons manufacturing.
We’ll then review the questionnaire together, talk about priorities and about the issues you care about, and most importantly, we’ll help you identify the values that underly your passion for the issues. ESG funds will almost never match your preferences exactly, but truly getting to the heart of the matter is how we can find the investment strategies that will leave you feeling fulfilled while still helping you accomplish your investment and financial goals.
Based on this conversation, we’ll implement an ESG investment strategy in accordance with your overall portfolio investment guidelines, and when appropriate, we’ll refer you to resources for alternative strategies. Over time, you can expect us to include your ESG funds in your portfolio and performance reports and notify you of any changes or new developments that may further align with your values.
ESG Funds Outperform Their Competitors
Back to that false choice we mentioned earlier: how do these funds perform? For a long time, there’s been an often-repeated myth about ESG funds. Many advisors will offer these funds to placate well-intentioned clients, but in the same breath will caution that they require a sacrifice on the performance side of the equation.
However, the numbers simply don’t bear this out: Morningstar reported that sustainable funds comfortably outperformed their conventional fund peers in 2019 — a pattern that has only accelerated during the pandemic. In 2011, a Harvard Business School study examined 180 US firms and found that those with strong sustainability policies outperformed their competitors by almost 4% per year. And in 2015, Deutsche Asset Management and Hamburg University conducted the most comprehensive meta-analysis on ESG investing. After reviewing over 2,000 empirical studies since the 1970s, they found that the large majority of studies reported a positive relationship between ESG and corporate financial performance. The researchers concluded that the business case for ESG investing is well founded. It’s becoming impossible to ignore that ESG funds are not a risk, they’re an opportunity.
And you don’t have to be Janet Yellen to understand why this makes sense! Companies that incorporate ESG into their decisions tend to be less risky than those making bad decisions, because the bad actors are more likely to incur financial losses (think of the BP oil spill, Volkswagen’s emissions scandal, and Wells Fargo’s account fraud… you get the idea). Doing the right thing has increasingly become good for business, and therefore good for investors.
ESG Investing Is Always Evolving
Of course, it’s good to remember that impact investing exists as a spectrum — a spectrum that has and will continue to evolve as investors respond to the changes within our economy and on our planet. How we make a difference with our money is also sure to change, and we may find ourselves using different approaches on that spectrum to complement our goals and values over time.
Now that ESG investing has proven itself as an increasingly powerful force for good, we invite you to utilize it the next time you feel a calling to make an impact. Because if 2020 has taught us anything, it’s that fostering our collective power will get us closer to a more equitable, more sustainable, more empathetic world.
Are you interested in ESG investing? Contact The Humphreys Group to learn how we can help you meet your goals.