“Ask an Advisor” features members of the Community Foundation of Broward’s Professional Advisors Council, who share insights about tax law, wealth management, estate planning and giving strategies that help local philanthropists create a BOLD impact.
In this edition of “Ask an Advisor,” we ask expert financial advisor Joan Crain, a former Community Foundation Board Chair, about ESG investing and why it interests many charitably minded clients.
What is ESG investing?
ESG Investing refers to constructing a portfolio with the dual objectives of generating strong investment returns while also having positive effects on society. ESG investors select companies by analyzing the impact of their activities in three areas:
- Environmental (e.g., the size of a company’s carbon footprint)
- Social (e.g., the effects on society of the use of tobacco, alcohol and gambling)
- Governance (e.g., a company’s board diversity and shareholder responsiveness)
As they did with its predecessor Socially Responsible Investment (SRI), investors often construct an ESG portfolio by screening out companies that they feel rate poorly on ESG factors and then refining their selection by giving extra weight to the stocks and/or bonds of companies with high ESG ratings.
What are some of the trade-offs and benefits of ESG investing that investors should know?
Increasingly, investors around the globe are interested in supporting ESG issues. Investing in what they feel is a more responsible way is consistent with their values and has more than just a “feel good” effect (which in itself is a significant benefit to some investors). Proponents point out that considering ESG factors may also improve long-term investment results. Companies with good governance and a concern for environmental sustainability may reduce their potential liability, increase employee productivity and outperform their peers.
However, measuring the success of ESG investing can be challenging. There are no universally accepted standards for quantifying the effects of a company’s ESG activities on society. Investors should be mindful of “greenwashing” – instances of inflating a company’s ESG credentials – as well as ESG ratings that don’t seem appropriate given a company’s core business. For instance, the ESG scores for some fast food, soft drink and energy companies have been relatively high, since leading rating firms have looked primarily at ESG risks to the companies rather than the risks the companies pose to society. The latter is more typically the concern for individual ESG investors.
Also, there is no global benchmark for measuring the relative performance of ESG funds, with studies during the past decade showing mixed results. Choosing an ESG investment pool with clearly defined screening guidelines for the types of companies to include and one that is overseen by trusted investment managers can help investors accomplish their goals.
Why are more charitable organizations, including the Community Foundation of Broward, providing an ESG Investment Pool option?
ESG investing is growing exponentially, from being a niche strategy just a decade ago, to $330 billion in ESG funds at the end of 2021. Bloomberg predicts ESG investments will exceed $53 trillion by 2025 – one third of total assets under management! With over 75 percent of investors in a recent survey indicating they would consider ESG criteria over the next 3 to 5 years, it is important for charitable organizations to offer this to their donors.
Incorporating ESG factors in investment selections is particularly important for younger investors, who are often passionate about creating a positive impact. This in turn is influencing their parents, especially when investing within “family” entities such as their donor-advised funds, family foundations and family trusts. As rising generations become more involved in investment decisions and two or even three generations work together to jointly manage their assets, family members are moving from dialogue about ESG to including ESG factors when managing their assets. For charitable organizations, whose missions are closely aligned with helping society and whose donors are seeking to “do good”, offering an ESG option makes eminent sense.
To talk about the new ESG Investment Pool available at the Community Foundation of Broward, contact Mark Kotler at firstname.lastname@example.org or 954-761-9503 ext. 130.