ESG Series: Part I

The latest trend in investing is ESG. ESG stands for Environmental, Social and Governance. About 25% of every investing dollar these days is going to ESG strategies. More than just a version of socially responsible investing, ESG is a broader look at capital allocation, with the aim of making investments to better the world. ESG is still evolving, but it has made a big impact on companies already. Most companies, especially larger ones, publish detailed sustainability reports now, making it simpler to evaluate their impact on the world. That said, because ESG is so popular, companies have an incentive to emphasize the positives and hide the negatives. Meanwhile, there are not yet any industry standards for evaluating ESG factors; instead multiple ranking firms have cropped up, publishing ESG ‘scores’ for hundreds of companies.

ESG has attracted hundreds of investment advisors who offer it as a product, partially because with the market so hot over the trend, fees can be significantly higher. Furthermore, to clients asking for ESG, performance is less important. They want to follow a set of values as a primary consideration. The perfect product is shaping up – fees can be high but demands for performance are soft.

Heretofore, ESG has relied heavily on technology companies, which are considered to be more green and diverse than, say, industrial companies. When the market is carried upward by tech stocks, as it has been for about ten years, ESG strategies perform well. However, the jury is out about whether ESG produces incremental performance over simply buying a low cost index fund. The trend is simply too new to evaluate – not enough data is available.

In our next installment, we’re going to take a look at a few specific companies and their ESG reports, using those as a springboard to talk about the philosophies behind ESG.