Ever wish you could leverage your wealth to spark positive social change?
Many of us have this desire but worry pursuing such a mission would threaten our own financial security. Now, however, there is a way to do good, while also doing well. It’s called ESG investing, and it is available to you at Stearns Financial Group.
Investing with a focus on Environmental, Social, and Governance criteria, allows you to invest in companies whose behaviors align with your own personal values. The best part is that you can expect to earn comparable returns to non-ESG portfolios while reducing your portfolio risk. This is because companies that use ESG criteria to run their businesses are less likely to become the target of corruption, scandal and face other issues that can diminish shareholder value.
ESG investing takes three broad non-financial factors into consideration when evaluating a company or project.
Environmental criteria consider how a company protects the environment while generating products and services, how it conserves resources and how it generally works toward having a minimal negative impact on the health of the planet and all its species.
Environmental issues your portfolio can impact:
Waste and Pollution
Greenhouse Gas Emissions
Social criteria look at how a company manages its numerous relationships. These includes how a company treats its employees, deals with its customers and handles its suppliers. It also considers how a company treats the community in which it operates.
Social issues your portfolio can impact:
Health and Safety
Employee Relations and Diversity
Working Conditions (including child labor and slavery)
Local Communities (such as explicitly funding projects or institutions that will serve poor and underserved communities)
Governance is a factor that considers how a company’s leadership behaves and the policies that its executives approve and enforce. This includes how much it pays its executives, how it monitors its internal controls and auditing functions, how diverse its executive leadership is, and how transparent the company is with its employees and the public.
Governance issues your portfolio can impact:
Corruption and Bribery
Donations and Political Lobbying
Board Diversity and Structure
We believe that an integrated portfolio — one that considers ESG factors in addition to traditional fundamental metrics — can deliver comparable financial performance while simultaneously having a positive impact on the world. *In fact, a meta-study of more than 2,200 studies in 2015 showed that ESG returns have equaled or exceeded those of non-ESG portfolios 90% of the time.
Increasing evidence also suggests that incorporating ESG analysis can play an important role in reducing portfolio risk. In its initial iterations, when entire asset classes were excluded, values-based investing was often associated with lower returns. Fortunately, this is no longer the case. In today’s environment, the goal is to promote good corporate behavior, regardless of asset class. ESG incorporates a “best in class” philosophy to all asset classes.
Increasingly, investors and consumers alike are recognizing that good corporate behavior positively impacts society AND shareholder value.
In our ever-expanding world of social media and instantaneous sound bites, companies risk losing significant shareholder value if they do not pay attention to issues such as corporate transparency, gender parity, racial inclusion, the health and well-being of their employees, the safety of consumers, and their carbon footprint.
Simply put, consumers and investors are increasingly unwilling to tolerate corporate behaviors that negatively impact their communities. As a result, what might be deemed “bad behavior” can easily go viral, causing not only reputational damage but financial harm.
Some examples of this phenomenon include the emissions scandal at Volkswagen, the security breach at Equifax and the false account openings at Wells Fargo. Each of these events could have been avoided with better corporate governance; and in each instance, shareholders would have saved millions of dollars in value. It is worth noting that each of these companies were downgraded by ESG ratings agencies up to two years prior to the scandals that emerged. We therefore extrapolate that good corporate behavior strengthens a company’s long-term sustainability, enhancing shareholder value.