In the past, socially responsible investing consisted of investments that did not make money from tobacco, weapons or alcohol, the so-called sin stocks. The main aim of sustainable investing was to avoid companies that involved themselves in questionable practices, including harming the environment.
Certainly, this still applies today. However, sustainable investing has progressed further where investments are chosen for their positive impact in areas called ESG. ESG investing stands for Environment, Social and Governance (Corporate). It sets standards for how corporations treat the environment and people. ESG investing is also called socially conscious investing.
Sustainable investing used to be on the fringes of investment advice but in recent years, endowments, non-profits and even Moody’s are considering ESG in their investments and ratings.
Environment is straight forward. Does a company have a neutral or positive impact on water, air, habitat and food? A corporation uses its resources, energy, water and land in a positive or no-impact manner.
Social in ESG is the way a corporation deals with employees and the community. Is there diversity among its employees and are they treated fairly? Are there favorable working conditions and do they look to assist in the communities in which they reside?
Governance equates to corporate governance. It includes executive pay, donations and political lobbying, board diversity and corruption.
The problem with ESG is nothing in the world is clear cut. There are always gray areas. Evoqua Water Technologies (AQUA) is a perfect case in point. Morningstar rates Evoqua (AQUA) very low on their sustainability scale due to business ethics. The company recently came to a proposed settlement in a stockholder action, which included enhanced corporate governance measures and employee training in risk assessment and compliance. While the company has had a black eye, many investors see the opportunity for change and the positive impact Evoqua has with clean water. Their 2020 sustainability report says the company is “dedicated to developing and delivering sustainable solutions that help customers and communities protect the world’s most valuable resource – water.” The final decision on whether AQUA is included in a positive ESG fund is subjective.
If you are looking to add or move money into an ESG fund, the best way to decide if it’s a good fit for you is the objectives of the fund. Criteria for each fund can be quite different. For instance, my goal is more women in leadership positions, so I put money into an ETF called SPDR SSGA Gender Diversity Index (SHE). The fund seeks to “provide exposure to US companies that demonstrate greater gender diversity within senior leadership than other firms in their sector.” For some, this is of no consequence. There are funds to meet many objectives, be it religious, gender, race or environment that is most important. The key is looking through the many options to find the best performing, least expensive option in the investment universe.
All in all, ESG is becoming more mainstream and acceptable as a main investment objective or at least an integration in the risks that investors are analyzing when investing.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.
Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.