There’s a trendy new moniker that’s meant to designate which companies and investment funds are “doing the right thing.” It’s called ESG, which stands for environmental, social, governance. Socially responsible investing is not only gaining popularity, it’s also outperforming traditional funds.
Under environment, independent research firms may look at carbon emissions, pollution and water usage to rate a company. For social, they may weigh employee diversity, fair labor practices and human rights. For governance, criteria is based on company board diversity, executive pay, political contributions and more.
ESG not only empowers investors to put their money where it reflects their values, but it also pressures companies to become more sustainable.
“There are companies who have said, ‘What can I do to be included in your index or your mutual fund or portfolio? What am I missing,’” said Kimberly Griego-Kiel of Horizons Sustainable Financial Services.
Griego-Kiel has advised clients in the socially responsible investing (SRI) space for decades. She said it started as a niche market but has seen it explode with interest in the past few years, especially as people zero in on environmental and social justice issues.
ESG funds are not just good for the heart, she explained, but also good for the wallet.
“Companies that treat their employees better, that take care of the environment, that have women in the C-suite, all tend to perform better,” Griego-Kiel said.
A Morgan Stanley report found that sustainable equity funds outperformed traditional funds by 2.8% in 2019 and 3.9% in the first half of 2020.
Griego-Kiel warned that there’s no perfect company in the ESG space but a few funds she personally thinks represent the space well include Calvert, Green Century Funds and Pax World Funds.
“Any fund that I might mention is something that each individual investor should discuss with their own advisor to see if it meets their particular needs,” she said. “This is not a recommendation for investment.”
There is no exact definition that classifies ESGs across the board since ESG risks are different for every industry. There is also no official rating system, though research firms like MSCI and JUST Capital independently score companies based on the criteria.
“There are so many funds out there now that I think it’s important for people to really look at the prospectuses if they’re doing it on their own and see what their social and screening criteria are, because there are a number of funds who will screen for one or two things and call it an ESG fund,” she said. “That’s not good enough for us or our clients. We want to make sure that it’s a broadly social-screened fund.”
