ESG Investing Part One: Aligning Your Portfolio with Your Values

Investing isn’t Just About Dollars and Cents Anymore

This article is Part One in a three-part series designed to tell you all you need to know about ESG investing, and how you can get started with us here at Arbor Capital.

The last few years have seen an explosion in the number of investors looking to align their portfolios with their values. If you’ve heard of Environment, Social, and Governance (ESG) investing, you should know that it’s not simply a trend – it’s a strategy that is proving to have true staying power.

Here at Arbor Capital, we are gratified to help our clients make more meaningful investments, and that’s why we offer customized ESG strategies to help our clients meet their goals. If you’re new to the topic of ESG (sometimes called sustainable investing), consider this article a primer to help you better understand a popular investment strategy, clear up common misconceptions, and even start thinking about whether it may be the right strategy for you.

The Myth of Sacrificed Earnings

Let’s get one common question out of the way at the outset of this conversation: Does ESG investing mean sacrificing earnings in favor of investing with your values instead? This is a common misconception, but the answer is no! We have seen social equality movements impacting the market in various ways over the past several years, and the data is showing that ESG investments don’t limit portfolio growth. In fact, ESG investors can actually outperform their counterparts. (For example, check out this article about the performance of ESG funds at the beginning of the COVID-19 pandemic in comparison to their traditional equivalents.)

Understanding the Subtleties Around ESG

There are a few different terms you may have heard in the realm of investing in alignment with your values. There are important differences, so let’s take a moment to consider them:

Socially Responsible Investing (SRI) – SRI investments avoid specific assets considered by the investor to be socially irresponsible. An example might be something like a tobacco company or a company that has a poor environmental record.

Impact Investing – Impact investing is a strategy where an investor chooses to invest in companies in which they can see the impact of their contribution. This is favored by investors who like to know where their money is going and what it is being used for. Whereas SRI is a bit like playing defense, impact investors go on offense. An example could be choosing to support renewable energy or sustainable agriculture.

Environmental, Social, and Governance Investing (ESG) – Also called sustainable investing, ESG investing is the most complex of the three because it is a framework for evaluating companies based on multiple factors. It is built on comparing classic investing criteria like valuation and earnings growth versus its sustainability concerning environmental, workforce, labor, and social issues. Environmental factors might be related to energy efficiency or pollution. Social factors may focus on goals like creating a diverse workforce or promoting fair wages. Governance factors could be related to things like regulating executive salaries or creating more diverse governing boards. In short, ESG factors can help investors target companies that are contributing to the greater good.

How Do You Find ESG Funds?

With ESG investments becoming increasingly popular, more and more companies and funds are given the moniker of being “sustainable.” As this trend increases, it’s important to keep a discerning eye out for those that are actual ESG funds and those that aren’t quite aligned with your values after all. There are tools available to help, like Morningstar’s Sustainalytics, which ranks and categorizes the risk of companies on the ESG spectrum.

While there are lots of resources out there to help you determine an ESG methodology, the information can be a bit overwhelming. You’re best served by finding an experienced financial advisor to help you get started.

Why We Offer ESG Investing at Arbor Capital

Here at Arbor Capital, we believe that Environment, Social, and Governance investing is not just a trend. We believe it is how investors can have an impact on their investment assets. If you want to make better investment choices for a better world, we can help. Whether you’re just starting on your ESG investing journey or you’d like to further build your impact, schedule a conversation with us today.

Stay tuned to Part Two in our three-part series ESG series, where we’ll discuss the steps you should take to add ESG investments to your portfolio.

 

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