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ESG Investing 101

By on August 27, 2020
Categories: INVESTING

Is it good enough that companies concentrate on just maximizing shareholder value?

More and more companies and investors are answering “no” to that question. This is reflected in mutual funds that focus on what is called ESG investing. ESG is short for environmental, social, and governance issues.

ESG investing goes a step farther than socially responsible investing that came on the scene in the 1970s. Socially responsible investing is focused primarily on ignoring corporations for moral or ethical reasons. For instance, the portfolios of socially responsible mutual funds might not contain stocks of tobacco producers, gun manufacturers, pornography publishers, alcohol producers, and casinos.

ESG investing is a trend that is particularly relevant today. How ESG investing might continue to evolve due to potential societal changes in our nation remains to be seen.

To appreciate what issues ESG funds care about, here are examples from the CFA Institute in each of the categories:

Environmental Issues

  • Climate change and carbon emissions
  • Air and water pollution
  • Biodiversity
  • Deforestation
  • Energy efficiency
  • Waste management
  • Water scarcity

Social issues

  • Gender and diversity
  • Human rights
  • Employee engagement
  • Community relations
  • Customer satisfaction
  • Data protection and privacy
  • Labor standards

Governance issues

  • Board composition
  • Executive compensation
  • Lobbying
  • Political contributions
  • Bribery and corruption
  • Audit committee structure
  • Whistleblower schemes

At the end of 2019, EPFR Global determined that Microsoft represented the biggest holding among all ESG equity funds around the world. Following behind in order were Alphabet, Disney, Apple, Nvidia, Gilead Sciences, and Clorox. Among prominent mutual fund and institutional investment companies that offer ESG investing opportunities are Vanguard Group, Dimensional Fund Advisors, Calvert, and BlackRock.

ESG investing is not a one-size-fits-all strategy. It allows individuals and institutions the ability to incorporate their unique values and beliefs into their specific investment portfolio construction.

If you would like to know more about how ESG investing can fit into your investment portfolio, one of our experienced wealth advisors would be happy to discuss.

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