Broker Check

ESG Investing: Will it Withstand the Test of Time?

November 01, 2022

We’ve recently seen several news articles suggesting ESG investing is “broken” or it’s a “sham.” To those of us who are knowledgeable about ESG and sustainable investing this seems preposterous. The news media is driven by sensationalism. Nonetheless, ESG naysayers do have some valid arguments. The purpose of this article is to provide a brief overview on how ESG differs from traditional investment approaches and to address the issues that these articles raise.

Sustainable investing seeks to align our investments with our values and uses a long-term perspective for evaluating in which companies to invest. Investing in renewable energy technologies to support concerns about climate change or companies that support advancement of women and minorities in management are examples of how our personal beliefs and values can be reflected in our portfolios.

Shareholder activism is gaining momentum and it is a thorn in the side of corporate executives who prefer to focus on the short term. After all, management compensation is too often incentivized by short term financial results. As more people take a values-based approach and invest with focus on long term metrics of success, their share ownership gives them votes or shareholder representation. Representation leads to the ability to influence company policy and direction. An example is the shakeup in Exxon Mobil’s board in 2021, where three outside directors (some with renewable energy expertise) took seats on what was considered an insular corporate board. This is one instance of many of how our investment dollars combined with shareholder activism can influence company management.

What is ESG? The acronym stands for environmental, social and governance. ESG is a process that financial analysts use for evaluating companies on metrics that could pose long term risks to a company, i.e. the three components of the acronym above. Think of fast-food companies. They use a tremendous amount of beef, the production of which has a huge carbon footprint. Not to mention use of plastics in packaging and the creation of large amounts of material waste. These are examples of environmental factors that could be financial risks in the long run.

This type of analysis necessarily involves measurement and ranking of companies that are more complex than measuring quarterly earnings. The ESG measurements are something critics point to as being questionable. Are the right metrics being used and how are they being used? One argument suggests that we should be measuring impact on the environment or planet and not on financial risks to companies. These are valid points, and the research continues to improve as the demand for meaningful data increases. Measuring impact to the environment is surely valuable but investors are also concerned about performance.

We as investors put our money to work and take on financial risk. We want and expect a return on our investment dollars. If these risks to a company reduce returns, they are important and should, if possible, be managed. Ultimately, we want to reward companies (with our investment dollars) that do well in addressing these risks and in doing so help our investment returns. These interests work in tandem to achieve our dual objectives; promote our values and earn a competitive return on investment, as measured by long term performance.

The Terra Blue motto is to be part of the movement to shift from a “You or Me World” to a “You and Me World”. The reality of the pandemic, climate change and global social injustice is begging for this shift. It is increasingly apparent that the United States is susceptible to global pandemics, to the threat of authoritarianism, and the impact of economic disparity. The solution is not with one leader, one country, one race or one belief system. As we recognize and depend upon the dignity of all people, we have vastly more human resources to draw upon for the determination, creativity and innovation that is required to meet the challenges we face. We believe ESG investing is an important tool in meeting the challenges we face. Our achievements will be measured in decades and centuries. We are honored to serve clients who share in this vision of a future unleashed by the courageous visionaries of today.

Investments are subject to risk, including the loss of principal. Environmental, social, and governance (ESG) criteria are a set of non-financial principles and standards used to evaluate potential investments. The incorporation of ESG principles provides a qualitative assessment that can factor heavily into the security selection process. The investment’s socially responsible focus may limit the investment options available to the investor. Past performance is no guarantee of future results.