Articles & Alerts

The global movement toward sustainability has permeated virtually all parts of society and life. Nowhere is this more evident than in the investing world. While investors had traditionally looked for the best returns without much regard for how the money was made, in recent years, it seems the conversation has started to change – and we may be reaching a tipping point. There is an increased call for companies and investment vehicles to show a more compassionate approach to business and this has had a marked effect on the financial world. Investors are increasingly asking that their investment advisors and other professionals have a stronger focus on sustainability and invest in those companies that “walk the walk”.

This type of investing is known by many names, all of which fall under a global umbrella of ESG: Environment, Social and Governance. ESG investing is a way to evaluate how a company’s practices in these areas may impact its stock return potential.

It would appear that ESG investing is no flash-in-a-pan; it is here for the long haul. According to the most recent report from the US Forum for Sustainable and Responsible Investment Foundation, investors held $11.6 trillion in assets chosen according to ESG criteria at the beginning of 2018, up from $8.1 trillion just two years earlier. MarketWatch stated that as of November 2019, socially responsible investing has grown to $17.7 trillion. Stated simply, from 2016 to 2020 this investing class has more than doubled, growing at an astonishing 52% in the last two years. CNBC reported that ESG investing has the potential to grow to $50 trillion in the next 20 years. Considering the current growth rate, that estimate may be low.

Nowhere is this more evident – and important – than High Net Worth (“HNW”) and Ultra High Net Worth (“UHNW”) investing. With so much on the line, it’s vital to know your options and make sure your investments support the issues that are important to you.

Let’s break down the acronym to address the individual elements:

E = Environmental

The environment component of ESG addresses the ways in which a company has an impact on the Earth, in both positive and negative ways. A business that shows a consistently positive focus on bettering the planet is held in higher regard by the financial community whose focus is on potential environmental impact.

If you are looking to invest in companies that have a positive impact on the environment, your research should focus on such topics as:

• Climate change commitment, policies and practices
• Straightforward disclosure of greenhouse gas emissions (and goals)
• Carbon footprint (pollution and emissions)
• Water-related conservation, usage and goals
• Renewable-energy use (primarily wind and solar)
• Recycling and safe waste disposal
• Environmentally friendly employee programs (such as clean commute, gardening and local food sourcing and energy efficiency incentives)

S = Social

A company’s social practices include those that have a positive impact on society, the local community and its people. This also extends into how a business’ practices impact employees, customers, consumers and suppliers. According to Gallup, companies that excel at engaging their employees achieve per-share earnings growth more than four times higher than their competitors.

For information on social aspects, ESG investors can look at such annual and respected lists as Forbes’ “Just 100” , Fortune’s “Best Companies to Work For” and others such as those produced by the Society of Human Resources Professionals.

When considering investing in socially forward companies, consider investigating such elements as:

• A public stance on social justice issues
• Employee treatment, pay and benefits
• Safety policies (including prevention of sexual harassment and discrimination)
• Whether companies invest in such hot-button industries as tobacco, alcohol or firearms
• Factoring diversity and inclusion in hiring and advancement
• Ethical supply-chain sourcing and contributions to relevant communities
• Consumer-protection importance

G = Corporate Governance

How a company’s executives and board of directors oversee a business makes up the Corporate Governance component. ESG investors look at how management connects to all stakeholders, and if the business and its practices are aligned with a sound mission. The idea of corporate governance is usually most pronounced during proxy season, when most companies file their financial statements and hold their annual meetings.

If you are an investor, particularly keen on how a business exercises good corporate governance, you can research topics such as:

• Diversity of the executive team and the board of directors
• Executive compensation, bonuses and perks (and the metrics these are tied to)
• Whether and how compensation is tied to a long-term growth strategy
• Independence of directors
• Transparency with employees, shareholders and the community
• Litigation brought by the SEC, DOL, Better Business Bureau and other governing or advocacy regulators or groups
• Political and PAC contributions

One very important question that many HNW and UHNW investors have is whether an ESG focus is more than  “nice to have.” Can it have a positive impact on returns? It’s one thing to have a good feeling, it’s another to have a solid portfolio. For the most part, researchers are saying yes.

Fortune found that S&P 500 companies in the top quintile in terms of ESG attributes outperformed those in the bottom quintile by more than 25 percentage points (2014-2018). It also found that companies with a high-ESG rating had stock prices that were less volatile.  Additionally, there is a great deal of data that shows that companies that consider their ESG impact and are rated highly, are also well-run.

Morningstar reported that U.S. ESG Funds outperformed conventional funds in 2019 and they found that ESG funds placed in the top of their quartiles. In recent months, S&P Market Intelligence found that throughout the COVID-19 pandemic, ESG funds have stayed stable and even outperformed more conventional funds.

Now that you know what to look for, how do you find it? Where can an investor turn to ensure than a company’s ESG practices match up with their words? For starters, investors should look to such reports as the Global Reporting Initiative (GRI), and Investors and Principles for Responsible Investment (PRI).

It’s clearer every day that the investing world is tracking with the broader societal focus on ESG.  In business, many call this “conscious capitalism”; a mantra stressing that businesses should serve all of its stakeholders, including the environment and society at large. Now more than ever, many investors, including those in the HNW and UNHW arenas, are finding that ESG is making good business sense – for themselves and the greater good.

If you are interested in discussing how ESG investing can fit into your broader financial picture and estate plan, please contact David Horton or your Anchin relationship partner at [email protected].