BIG TOPIC! ESG is in the news more and more and has made its way into the world of investing. You may already have seen ESG offered in your 401k or 403b plan!
What is ESG? It stands for: Environmental, Social and Governance. Also called “sustainable investing,” the ESG category uses its three principal criteria to guide investment decisions. Funds in the category currently hold approximately $12 trillion of assets in the U.S. representing nearly 26% of the professionally managed assets as of 2017.* The obvious audience for ESG is Millennials (those born between 1981 and 1996, and aged 23 to 38 in 2019). The “millennial generation” has been known to prefer investing if “their investments [are] doing social good”* according to a survey.
But ESG may not only be for the younger generation. For all investors and as with any investment, the first step is gaining (preferably from a professional) a greater understanding of the nuts and bolts of the strategy. Here are several basics and look for the TGIF 2 Minutes sequel!
Ways you may hear ESG expressed in business:**
- “We often need a reminder of the effect our businesses have on the lives around us.”
- “Imagine the impact we could have if we were more intentional about connecting our company’s culture to the community.”
- “We want to develop an impact-driven culture.”
What’s in and what’s out?
ESG is about aligning capital (money) and investments with a person’s values. These values can include:
- Friendliness to the environment
- Workplace diversity
- Meaningful female representation on corporate boards of directors
- Standing against gun violence
What about performance and track record of ESG investments?
Lack of knowledge overall – by both advisers and investors – has been part of the reason for misinformation regarding performance. More recent research^ quantifies that on a 5-year trailing basis ending 2018 that ESG equity fund returns were equal with non-ESG equity fund returns. Similar for ESG bond funds and non-ESG bond funds.
Expenses, too, for ESG funds on a broad average basis have been found to be on par with non-ESG funds.
So much more can and will be said on this topic. But for now, one thought with which to leave you: if ESG or “sustainable investing” could be an impetus for everyone – especially younger people – to save more and to WANT to save more, ESG could be a game changer on multiple levels.
*Greg Iacurci, “401(k) plans lag in ESG investing”, InvestmentNews, Oct 5, 2019.
**Ron Carson,”4 ways to build a team that believes in making an impact”, InvestmentNews, Sep 26,2019.
^InvestmentNews, “Don’t write off ESG investments out of habit – the demand is real”, March 23.2019.