Environmental-Social-Governance (ESG)Funds: Their Time Has Come

My younger son became a vegetarian 15 +years ago. His “aha” moment came when he concluded there was no ethical difference between his unwillingness to slaughter a cow,  and purchasing its T-bone at the market. We’ve known quite a few vegetarians before and after Seth’s decision to become one. Being vegetarian is a lot easier, and more popular lately.

Super markets of all stripes are filled with products that improve the culinary life of vegetarians. Nevertheless, my son, missed the sensory pleasures of chomping into a high quality hamburger. But no more. He enjoys impossible burgers at The Counter in Los Angeles at least once a week.

ESG Funds are enjoying a similar transformation. Calvert began creating “socially responsible” funds in 1982. We took a small position in a few, but they didn’t give us what we were looking for – a two-kid college fund that would grow quickly over ten years. So, we got off the high road and let our advisors choose funds that would better serve our time-sensitive goals. Now, like with Seth’s impossible burger, aligning personal values and needs is quite possible.

As we protect and modestly grow our retirement assets, there are many high performing “value-congruent” funds to choose from. Guest blogger Gabe Rissman shared his Impact Tracker list with our financial advisors (as well as our readers), and they were blown away. Like many advisors, ours didn’t realize how much the ESG niche had grown, or how well it performed. There are lots of choices out there. A glaring exception is employer run 401k plans. (This will be the subject of an upcoming post – there’s no good reason employers or their vendors should skimp with their ESG offerings.)

What part(s) of the ESG matrix call out to you?

There are many ways to slice and dice ESGs. Initially I explored Environment friendly funds, but I’m also drawn to funds which emphasize Social and Governance best practices.

How unblemished do your ESG funds need to be? Suffice it to say that it’s hard to be “pure as the driven snow.” It’s relatively easy to align your values within one of the E-S-G categories. But it’s challenging for me to find companies that consistently rank high in each of the categories. One of my early posts may help you  ponder this potential complication: Are You a Maximizer, Satisficer or a New Fangled Hybrid?

How has the ecosystem changed? Investopedia describes the phenomenon as a merging of two investor motivations: 1) increased opportunity for financial return 2) a growing desire of individual and institutional investors to impact the “greater good.”

 “According to Goldman Sachs, companies that are considered leaders in ESG policies are also leading the pack in stock performance by an average of 25% over the long term. This echoes similar research by RCM, which found that between 2006 and 2010, investors could have added an additional 1.6% a year to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.” (Investopedia)

For those who prefer “everyday” examples, consider Starbucks. From the beginning they embedded their values into their business plan: personnel policies that increased worker morale, retention and quality of life; policies that favored coffee growers who treated their workers and agriculture with respect; governance that valued transparency, diversity, disclosure of conflict of interest.

ESG funds that exclude fossil fuel often increase their position in renewables, electronic vehicles (EVs), and the technology that supports clean energy; and/or they weight heavily on companies like Google which are “agnostic” with respect to the environment.

Guido Gives, Executive Director, Applied Equity Research for MSCI ( a well regarded family of funds) gives a sophisticated explanation of the ESG ecosystem’s success in the above link. He focuses on micro and macro risk factors, and compares the highest and lowest quartile of the MSCI World Index fund, concluding there is causation, not just correlation between their business practices and financial return.  He computes the level of “ESG momentum” from the highest quintile World Index performers, and offers financial advisors a valuable new analytic. It’s a wonky link, but well worth the read.

The Bottom Line

• ESG funds are rapidly becoming a popular and enduring investment strategy.
• It takes some effort to find high performing ESG funds that match multiple values.
• If you have a financial advisor, encourage them to explore ESG funds with you. With your advisor or on your own, check out Real Impact Tracker.
• Stay tuned for more ESG posts. Here’s one I hope to write about soon, SHE is an exciting ESG that invests in companies where women have voice and power!
• Your questions and comments help guide me. So please don’t be shy.
• Thank you for sharing Shades of Green with others and helping to grow our follower base. Perhaps you know someone who will find this post useful…