Sustainable investing has expanded from a niche interest to a mainstay of investment strategies around the world. Institutional investors as well as individual investors have been focusing not just on the financial promise of the companies in their portfolios but now also on the environmental, social, and governance (“ESG”) performance of these firms. According to Morningstar’s 2020 Sustainable Landscape Report, there are more than 300 sustainability-oriented mutual funds and ETFs in the US with total assets as of 2020 totaling $150 billion- up nearly 35% in the past three years. The interest in ESG spans the world as well. The Global Sustainable Investment Alliance estimates that the assets under management (AUM) in funds that use some type of sustainability screening in their investment strategy now exceeds $30 trillion!
Broadly speaking, ESG investing is about investors looking to ensure their investments reflect their values. Some ESG strategies emphasize eliminating certain companies from portfolios, such as those that pollute the atmosphere or have poor social or corporate governance records. Other ESG strategies focus on investing in businesses that are in line with their values and priorities in certain areas such as animal rights, religious preferences, women-majority boards, or better farming practices.
For years, many investors had a difficult time investing with their values due to high fees, worries about underperformance vs. conventional investing, and lack of well-constructed investment vehicles such as mutual funds and ETFs. Furthermore, there have always been concerns about how to accurately rank companies based on those value criteria and then how to align the investors’ values with their portfolio holdings.
More recently, the meteoric rise of sources of accurate data (ranking companies based on ESG criteria) has exploded and companies now know they need to be aware of their ESG ratings and their impact for investors. For example, Blackrock, one of the largest fund companies in the world, has made sustainability essential to its investment strategies. In his 2021 letter to CEOs, Chairman and CEO Larry Fink refers to the “historic investment opportunity presented to our clients by the climate transition and how we are at the beginning of a long but accelerating transition, in which sustainability has become a critical factor in determining companies’ long-term value.” Vanguard, another one of the largest fund companies, has made the corporate governance of companies a key focus for their investment strategies and making sure that the boards are not enriching themselves at shareholders’ expense and that companies’ values are aligned with their investors’ interests.
Another obstacle to ESG investing is worry about investment results; however, the investment returns from ESG strategies have actually provided higher returns over traditional investment strategies in recent years. Over longer time frames, ESG indexes have provided similar returns as conventional benchmarks (MSCI ESG Global Index vs. MSCI Global Index- 11/2009 to 7/2021). Many endowment managers and boards also believe there is a reduction of risk for portfolios by utilizing these ESG strategies, i.e., litigation risk is generally lower for higher ranked companies. In fact, during the recent COVID downturn, ESG portfolios performed better and exhibited lower risk than conventional portfolios.
At Baldrige Asset Management we have been crafting ESG strategies both for our investors who have specifically requested that some companies be avoided to reduce their exposure to certain industries and/or to broadly focus on the companies that are leading the way in ESG investing. After researching and teaching for almost a decade about the ESG investing landscape and concepts, we have now decided to acquaint all of our investors with ESG investing strategies. We believe that for many investors there is much to gain in being able to align your personal values with your investment portfolio. We now have the capabilities and insights at our disposal to make this a reality. If you wish to explore the idea of investing with your values, let us know and we can provide you with more information as well as discuss strategies and investment options that will work for you.
Edwin R. Baldrige III, CFP®