The financial industry, like many others, has its own set of acronyms to make communicating concepts easier. The problem is that for those outside the industry the meaning of these acronyms may not be intuitive. One that is becoming more popular each day is ESG.
We have three learning objectives for this post:
- To understand the meaning of ESG and have a grasp of the limitation of interpreting exactly what it means
- To determine the impact on your investment portfolio of converting from a conventional portfolio to an ESG – based allocation
- To be able to research appropriate investments to build an ESG portfolio allocation
ESG stands for Environmental, Social, and Governance. It may also be referred to as “impact investing”. These are the three main areas investors look to in determining if they want to own the shares of common stock or the debt obligations of a particular company. Or, in the case of a pooled investment vehicle like a mutual fund or exchange traded fund (ETF), what type of securities are held in the fund.
ESG investing is becoming a big deal. Mutual funds and ETFs that are ESG oriented are gathering assets from investors at higher rates than their conventional counterparts. A recent Bloomberg study projected that by 2025, ESG assets would total more than $50 trillion worldwide, which is more than a third of the global total of investable assets! Europe is ahead of the U.S. in the focus on ESG, but the trend here domestically is picking up steam.
Major investment firms have thrown their weight behind the movement. BlackRock, the world’s largest asset management firm ( BlackRock.com ), has ESG concepts listed front and center on their homepage. Other firms include AB Global, Calvert, Natixis and Putnam.
But what does it all mean to you? ESG investing is placing a priority on where your capital is invested. We all invest to earn a return on our investments, but some investors also place a priority on investing in companies which promote sustainability for the environment, take on social issues to provide equal opportunity to different races and women, and governance which relates to the companies board of directors and management and the level of transparency and responsibility used in decision making. While it might sound a bit cliché, the idea is that while we’re investing, we should promote the betterment of the earth and humankind. After all, there’s nowhere else to go and we have to live together.
All this is not quite as easy as it sounds though. In some cases, it’s as clear as day. Investing in a tobacco company can’t be doing anyone any good. Investing in a company that provides renewable energy that reduces carbon emissions helps everyone. But there are some in-between situations. Many investors view traditional energy companies as poor stewards of our environment, but yet those same individuals drive large SUVs and love the uninterrupted flow of electricity to their home. We are not yet close to the point where non-carbon-based energy sources can provide our electrical grid needs. This will change some day but is it a ways off.
The point is that ESG is very subjective to the individual investors view and opinions. What I view as an ESG friendly company may not make someone else’s grade. Each investor should decide how they wish to implement ESG in their portfolio design, ranging from 0% to 100%.
Impact of Implementing
Let’s say you’ve made the decision to convert part or all your traditional diversified portfolio to an ESG-based portfolio. If you’re starting from a cash position, this is an easy task. In our next section, we include some resources to help select investments. If, however, you have had your portfolio invested for many years in what we’ll refer to as traditional stocks or funds, there may be a conversion cost. In other words, the investments you’ve held for a while have most likely appreciated in value, perhaps by a good bit. The process of converting to an ESG portfolio requires those assets be sold, resulting in taxable capital gains taxes, unless you hold the assets in a tax qualified account like an IRA.
Now comes the decision! Do you follow your heart and convert your portfolio to ESG, paying the necessary tax due, or do you commit to a plan like just investing new money into ESG style investments and keeping your existing holdings? Of course you could also commit to a plan of making the conversion over a few years, minimizing the tax pain in any one particular year. If you happen to have some capital losses to harvest or some capital loses carried forward from previous years, the decision may be easier.
Where to Get Information
In addition to the fund and ETF companies mentioned above, which sponsor easy, one decision ESG themed investment products, you can also search for information easily online. Yahoo Finance website offers ESG scores from Sustainalytics, a firm specializing in scoring publicly traded companies across the three primary areas of concern.
The Google Finance site lists scores focused on climate change. Both the Google and Yahoo sites are free to be used by the public. Large brokerage firms, like Charles Schwab & Company, offer clients access to stock research reports from third parties like Morningstar, which contain ESG ratings.
If you want to learn more about implementing a professionally managed ESG investment portfolio that builds wealth and combines with your retirement income plan call us today at 941-778-1900 or visit www.integracapitaladvisors.com to schedule an introductory meeting.