ESG investing (Environmental, Social and Governance Investing).
Following your values while pursuing your dreams.
If you’re like many people you have social concerns. You may have joined an Avon Walk for the Cure Race or Team in Training to express your values. However, you may find that a deeper analysis of what you are invested in May conflict with your concerns. The owner of Hobby Lobby was called a hypocrite by Forbes and Mother Jones when investments in the 401(k) he provides employees conflicted with his values.
Do you give money to charities while simultaneously investing in companies that create the necessity for that charity? In fact, would you buy products from those companies or would you seek to avoid them? If the answer is yes to both of these, that is one of your life values that should be incorporated into your financial planning. I call that financial life planning that incorporates values-based investing.
Exactly what is ESG investing?
First off, ESG investing is investing to investing that aims to make a profit. My associates and I believe it means providing our clients with an opportunity to align their personal values with their investment decisions. ESG investing screens the universe of potential publicly traded companies that your advisor, investment manager or portfolio manager can invest in. Let’s say for example that you and your advisor decide to invest in companies that pay dividends and are one of the 500 largest US companies. If you were to use a screening firm such as eVALUEator you would screen out about 10% of the top 3000 companies. A few issues associated with ESG investing include:
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Does ESG investing make money ?
Since 1990, the MSCI KLD 400 Social Index (formerly Domini 400 Social Index) has had an annualized return of 10.4%. As of March, the three largest constituents of the index are Google, Proctor and Gamble and IBM. This index comprises companies with high Environmental, Social and Governance (ESG) ratings and excludes companies involved in Alcohol, Gambling, Tobacco, Military Weapons, Civilian Firearms, Nuclear Power, Adult Entertainment, and Genetically Modified Organisms (GMO). The Index aims to serve as a benchmark for investors whose objectives include owning companies with very high ESG ratings and avoiding companies that are incompatible with specific values-based criteria.
ESG investing in your values based financial plan
Evaluating ESG investing starts by asking, “What are your life goals that you can achieve by managing your financial resources better? How much does it cost? How much do you need to save and invest to get there? What risk adjusted return you are comfortable with? Let’s say that is 7%. What ESG investing investment allocations have a reasonable chance of achieving that return?
In addition to providing investors investment returns, some companies that specialize in ESG investing also are involved in shareholder advocacy. That means that they take the stock certificates and the voting rights and put pressure on companies regarding social issues such as more women on their board of directors. This could be a way to extend the power of your dollars in forwarding causes that matter to you.
Getting help with ESG investing
We recommend you work with an investment advisor representative (opposed to a broker) specializing in ESG investing that gets paid a fee. Ask them if they work in an open environment or must choose from a limited set of investment options? This expands your choices of ESG investing investment products. Further, brokers (registered representatives) might have a smaller set of options that they can consider. This is due to the fact that it limits the breadth of ESG investing options. Even doing this may not mean that your investment advisor representative is knowledgeable about incorporating ESG investing options into your values based financial plan.
(1) The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The selection universe for the MSCI KLD 400 Social Index is the MSCI USA IMI ESG Index, which is made up of securities of large, mid and small cap U.S. companies selected using an ESG Best-in-Class methodology. Companies involved in the following activities are excluded from the selection universe: Alcohol, Gambling, Tobacco, Military Weapons, Civilian Firearms, Nuclear Power, Adult Entertainment, and Genetically Modified Organisms (GMO). The MSCI KLD 400 Social Index is designed to maintain similar sector weights as the MSCI USA Index and targets a minimum count of 200 large and mid cap constituents. Companies must have an IVA rating above ‘BB’ and an Impact Monitor Score greater than 2 to be eligible for the Index. At every Quarterly Index Review, constituents are deleted if they are deleted from the MSCI USA IMI ESG Index, fail the values based exclusion screens, or have declining ESG performance or involvement in very severe business controversies. At every Quarterly Index Review, additions are made to the MSCI KLD 400 Social Index to restore the number of index constituents to 400. Companies are added to the MSCI KLD 400 Social Index from the list of eligible additions based on considerations of ESG performance, sector alignment and size representation. The Index is float-adjusted market capitalization weighted. The MSCI KLD 400 Social Index is reviewed quarterly coinciding with the regular Index Reviews of the MSCI Global Investable Market Indexes. Changes are effective at the beginning of March, June, September and December. Constituent selection is based on data from MSCI ESG Research.
(2) Past performance is no guarantee of future results.
(3) All indices are unmanaged and may not be invested into directly.
(4) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(5) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
(6) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IL, MI.
(7) No strategy ensures success or protects against a loss. Investing involves risk including potential loss of principal
(8) Investing in a specific sector involves additional risk and will be subject to greater volatility than investing more broadly.