Understanding ESG Investing
Values-driven investing is becoming more and more popular—and increasingly effective. ESG investing, in particular, has become a way for investors to put their money to work while supporting businesses, industries, and causes they care about.
Investors who employ ESG strategies consider an investment’s financial returns as well as its holistic impact on local communities and the world. ESG investing helps measure impact in terms of three main pillars:
Environmental – This factor measures how sustainable a company is by evaluating the products it makes and the process through which those goods are produced. Environmental effectiveness measurements also include emissions and recycling practices to give a clear picture of the company’s carbon footprint.
Social – The social pillar focuses more on community, both internal and external. Internally, factors considered are questions such as: Is the company conducting business ethically everywhere it operates? What’s its track record on hiring, diversity, and equality? How does the company treat its employees? Externally, what a business returns to the communities it resides in is considered.
Governance – The corporate governance pillar takes into account company structure and leadership, which includes compensation, diversity, and potential conflicts of interest for executive management and the board of directors. Are board member incentives directly tied to the business’ success? Transparency also plays a large role in this category.
Types of ESG investing
Though ESG investing was originally associated with sustainability and environmental or social impact factors, the concept has evolved over the years. Now, you can use scores to rank potential investments based on criteria that aligns with your goals and personal beliefs—so you can sleep at night knowing that your ESG investments can have an impact for positive change.
While climate change is an important issue that many investors consider, there are plenty of other issues to think about when building an impactful investment strategy. You have the opportunity to use ESG investing strategies to customize your portfolio, by breaking down a stock index by industry and choosing the companies with the highest ESG scores.
Your personal goals and values might extend beyond the criteria of ESG scores—perhaps more religious or socially conservative. In that case, you may want to blend ESG investing tactics with related strategies like impact and socially responsible investing (SRI).
Socially responsible investing (SRI) vs. environmental, social, and governance (ESG) investing
Socially responsible investing, or SRI, involves building your portfolio while excluding companies or industries whose actions might have a negative environmental or social impact. If you are employing a socially responsible investing strategy, you might choose to avoid gun manufacturers or oil and gas companies that have had catastrophic oil spills in recent years.
Investors who use SRI and ESG investing strategies invest their money with a purpose: to better society and the world around us. However, though there is overlap between SRI and ESG investing philosophies, the biggest difference lies in how they each accomplish that goal.
Socially responsible investing actively excludes companies that participate in unacceptable or controversial activities from your portfolio—to encourage businesses to operate more ethically. ESG investing, on the other hand, measures a company’s environmental, social, and corporate governance impact and assigns a score based on those criteria. Instead of excluding firms or industries, ESG investing simply rewards the “best-in-class” businesses for positive ways they can impact society. For example, the same gun manufacturer or oil company SRI might exclude from consideration could receive a high ESG score for having a diverse board of directors and EEO-compliant hiring practices.
SRI and ESG investing can combine to make up an effective, diversified investment strategy that has a meaningful, positive societal impact.
Benefits of ESG investing
Outside of the obvious environmental, social, and corporate governance benefits involved in ESG investing, evidence suggests no long-term differences from non-ESG investing in terms of returns and risk.
In an often-cited 14-year mutual fund study by the Morgan Stanley Institute for Sustainable Investing, findings suggested that there was “no financial trade-off in the returns of sustainable funds.”1
At Mercer Advisors, our recommended 2020 ESG solutions outperformed their respective benchmarks, with our most popular ESG-focused individual stock strategy returning 22.25% versus the S&P Index’s 18.40%.
ESG investment strategies
You may want to invest your money in companies that align with your values. At Mercer Advisors, we help you build a customized portfolio tailored to what you believe is important. Our SRI and ESG investing solutions will give you more choices than ever—so you can easily screen out companies or entire sectors that don’t fit into your strategy or philosophy and/or reward those who do.
You have your beliefs, and we think you should invest your money the way you see fit, without sacrificing returns. Learn how you can benefit from our personalized, multifaceted approach that integrates different types of ethical investing strategies—and much more.