October 26th, 2017
For some time, investors have been using their investment dollars to effect change in the world. Some focused on “green” investing, where investors avoid what they believe are environmentally dangerous companies and invest in others with greater sustainability efforts. Others focused on values issues, like tobacco, weapons, or gambling. With increased investor demand, investment firms developed ideas to meet the various needs in this area. Many investment products are now labeled “ESG”, which is an acronym for environmental social and governance. Loosely translated, environmental means investments are in some way conscious of the underlying effects a given company has on the environment. “Social” refers to how the company interacts with society at large, including its own labor force. Lastly, “governance” refers to how transparent the company is with investors, and how investor-friendly the company’s governance structure is.
Perhaps you like the idea of some form of responsible investing but aren’t sure you know enough about it. Let’s dispel a few of the preconceived beliefs when it comes to ESG investing:
Will an ESG portfolio result in lower performance compared to broad market benchmarks?
First, every portfolio should be constructed to a given client’s needs, so not every client’s portfolio should be compared to broad market benchmarks. However, assuming a client’s portfolio was appropriately compared to the broad market indices, there have been numerous studies suggesting that overall performance has been much closer to benchmarks over recent years compared to 20 years ago. Some studies even show better performance from companies that emphasize strong environmental, societal, and governmental policies. Here are links to two of these studies: Barclay's ESG Study, Journal of Sustainable Finance & Investment Studies.
Is the cost of an ESG portfolio always higher than an average portfolio?
As interest in ESG has grown, there has been an enormous expansion in the number and variety of mutual funds and exchange traded funds (ETFs) across the spectrum. Of course, costs vary between all investments, however with research, you can limit costs accordingly.
How limited are the investment choices?
The ESG industry has evolved over the years. Given the popularity of ESG, each year more and more investments are launched. There are more than enough investment options, both old and new, to comprise a portfolio.
While there are many benefits to investing in an ESG portfolio, one cannot lose site of the overall risks of investing in any portfolio. Investors run the same risks as they do with other investments and there are no guarantees against losses, especially in a declining market. A customized ESG portfolio based upon your individual views, investment goals, risk tolerance and liquidity needs, will allow you to find an appropriate balance between risks and reward.
If you are interested in ESG investing, want to see if it is a financially responsible decision for you, or would just like more information on this type of investment, visit us at Frisch Financial Group. Given that each investor has different causes that are important to them specifically, we customize each portfolio to help you make investment decisions that help mirror your philosophy within your investment portfolio. Please contact us for more information. We have offices in New York City, Long Island, and Tampa and we serve the surrounding areas.