So, it’s 2021.
And if you follow investing trends, the value proposition of ESG Investing has been pretty well-established.
As the storyline goes, using ESG strategies can help align investors’ money with their personal values by purchasing stocks, bonds, ETFs and other equities that rank highly in Environmental, Social and Governance factors.
Not only does ESG consider an investment’s financial returns, but its overall impact. Although personal value systems are unique, many investors use ESG as their way to support business efforts they perceive to be sustainable, ecologically-friendly and social justice-oriented.
They also use it as a way to avoid interests perceived as harmful – primarily in industries such as firearms, fossil fuels and big tobacco.
While this all sounds good and well … how well does ESG Investing really hold up? Does the ethical values or offered by ESG investing match the performance of value & growth-seeking methods?
We’ll do our best to tackle this – as we keep in mind that as a savvy, driven investor, you seek financial advice and professional guidance (Like Signet Strategic Wealth) that understands not only your goals, but your values.
GOOD INTENTIONS, BETTER RETURNS?
A lot of studies have been done examining the relationship between ESG and financial performance. The problem with those studies is that investing methods and strategies change yearly – as do forward-thinking companies. Also, most of those studies were written before 2015.
But according to a recent NYU Stern report, researchers found six key takeaways regarding the financial impact of ESG Investing:
1.) Improved financial performance due to ESG becomes more noticeable over longer time horizons
In other words, the longer researchers study this, the more we find out. And, as we suspected, the companies who focus on ESG are doing well.
2.) ESG integration as an investment strategy performs better than negative screening approaches
In short, researchers are finding that funds which are exclusively focused on ESG are performing better than ones that seek to simply exclude non-ESG equities.
3.) ESG investing provides downside protection, especially during a social or economic crisis
Meaning, it’s appearing that ESG-oriented companies are starting to be viewed as less volatile.
4.) Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors, such as risk management and more innovation
e.g., sustainable companies tend to innovate more, manage risk better, and perform at higher levels.
5.) Studies indicate that managing for a low-carbon future improves financial performance
Companies that work to reduce carbon have shown : have historically shown strong financial performance.
6.) ESG disclosure on its own does not drive financial performance
Just because a company says it’s good, doesn’t mean it’s good business.
Most importantly, very few studies found a negative correlation between ESG and financial performance.
Here’s how they worded it:
“Analyses found positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital. Five years later, we have seen exponential growth in ESG and impact investing – due in large part to increasing evidence that business strategy focused on material ESG issues is synonymous with high-quality management teams and improved returns.”
So, what does that mean? Let’s unpack a few points:
-High-performance, influential, visionary managers are landing at ESG-focused companies.
-These ‘visionary’ leaders are looking toward the future – and it seems the future is ESG-focused.
-These forward-thinking shifts are arguably walking arm-in-arm with improved returns.
MATERIALITY, AND WHY IT MATTERS:
To most non-accounting types, materiality is a big, hairy, hard-to-grasp concept.
As defined, “the materiality definition in accounting refers to the relative size of an amount. Professional accountants determine materiality by deciding whether a value is material or immaterial in financial reports.”
Which means what, exactly? Materiality determines how much a particular action taken by a company actually affects a company’s bottom line.
Per the corporate communications firm Edelman, companies focused on ESG can take these steps to not only determine the impact of ESG within companies, but also communicate its value to their stakeholders.
1.) Conduct a Materiality Analysis
2.) Develop a Materiality-Driven Strategy
3.) Create Materiality-Driven Reporting
4.) Operationalize Materiality-Driven Stakeholder Engagement
Simply put, it’s becoming easier for companies to determine what ESG factors are material to businesses, and how to track their progress in financial reports. Which, for investors, could mean less ‘greenwashing’ and more green days in the market.
TRIED, CERTIFIED & TRUE:
In recent years, there has been a movement to reform capitalism. (Big task, right?)
The Business Roundtable, which is comprised of CEOs and top executives from some of the country’s largest companies (and largest market caps), issued its Statement on the Purpose of a Corporation in the summer of 2019.
Long story short, the statement actually redefined the purpose of a corporation to promote an ‘economy that serves all Americans’. Kinda huge news, huh?
Material (See what we did there?) to this proclamation, some major storylines are emerging among corporate leaders:
1.) Requiring companies to publicly report on their ESG impact, with standard, easy-to-understand metrics.
2.) Customers holding corporations accountable – insisting they release sustainable products, and cease engagement in unsavory business practices.
3.) Companies who are serious about sustainability should consider putting purpose in their charter, and becoming benefit corporations (Certified B Corps).
PUTTING IT TOGETHER:
In summary, ESG investing isn’t going away. In fact, it’s reaching the boardrooms of all major companies. And there’s a strong body of evidence to support the argument that ESG has already – and will continue to – have impact on your financial returns.
HOW SIGNET CAN HELP:
It’s our mission to provide investment resources and strategies to clients and financial institutions, helping them develop a greater knowledge and passion for sustainable, responsible and impact investments.
Let us help you find your mark with our experience.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
The return may be lower than if the adviser made decisions based solely on investment considerations. All investing involves risk, including loss of principal. No strategy assures success, or protects against loss.
The financial advisors at Signet Strategic Wealth Management are registered representatives with and offer securities and advisory services though LPL Financial, a registered investment advisor. Member FINRA/SIPC.
Source 1.) “ESG and Financial Performance: Uncovering the relationship between ESG and financial performance through meta-analysis of 1,000+ studies“ – NYU Stern School of Business
Source 2.) “An ESG Reckoning is coming” – Harvard Business Review
Source 3.) “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans”
Source 4.) ”What is materiality? The AICPA definition of materiality changes” – Becker
Source 5.) ”The Symbiotic Rise of ESG and Materiality” – Edelman
Source 6.) “Analyses found positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital. Five years later, we have seen exponential growth in ESG and impact investing – due in large part to increasing evidence that business strategy focused on material ESG issues is synonymous with high-quality management teams and improved returns.”