When Money Meets Meaning

Investing with your values is growing in popularity, but challenges remain.

Perspective Guest 01

It’s finally over! It’s an understatement to say that 2020 will go down as one of the most disruptive years in recent history. We have all been impacted by some combination of the pandemic, social unrest, business closures, personal losses, work-from-home strategies, hurricanes, competing narratives of the election season, and the stock market crash and dramatic rebound.

Navigating through 2020’s challenges was incredibly difficult, but the isolation provided an opportunity to reflect on what we value. We may have thought and continue to think about how we spend our time, how we treat others, and how we spend or invest our money.

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For many investors, that has meant an increased desire to align their investments with their values, focusing on corporations that exhibit good stewardship over ESG factors.

What is ESG?

Environmental, social and governance (ESG) factors are criteria that can be used in evaluating investments. They dovetail with many of the very issues we confronted in 2020 and will face in the future. Some examples of ESG criteria to assess a company’s stewardship include:

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• Environmental — issues regarding energy efficiency, climate change and water scarcity;

• Social — issues regarding employee relations, labor standards, community relations, customer and supplier relations, and gender and diversity;

• Governance — issues regarding appropriate oversight, board composition, governance best practices and executive pay.

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The assessment of ESG factors does not replace the time-tested financial analysis of company valuations, but it does inform our thinking, especially relating to risk assessment, and can serve as an important part of the decision-making process.

Some of these factors have previously been considered when assessing a company’s risks. Seen through the ESG lens, however, it is a more deliberative and broader evaluation of corporate activities. It is becoming a differentiator for investment selection.

Those interested in ESG may want to ensure that these factors are considered in their investments, while others may be drawn to investing in a growing number of ESG-themed investments on specific topics of importance to them.

What is its significance?

ESG was introduced with a 2005 report entitled, “Who Cares Wins: Connecting Financial Markets to a Changing World.” The thesis was that companies that perform well in these three areas could better manage risk and opportunities, foster sustainability and improve social outcomes, and the report laid the groundwork for ESG development. In 2006, the United Nations launched Principles for Responsible Investment (PRI), and currently more than 3,000 global financial institutions are signatories and committed to integrating ESG issues into their decision making.

Overall global assets under management at funds leveraging ESG data have increased to more than $40 trillion in 2020, as reported by research firm Opimas. ESG-themed strategies are also growing rapidly, with Morningstar reporting 400 new ESG strategies launched by funds in their investment universe in 2019, compared with 160 launched in 2016.

Perhaps the most compelling change is the focus on ESG matters by corporations and the institutional investors who hold the vast majority of their stock. ESG has developed into a topic of prominence and influence among investors, asset managers, rating agencies, boards of directors and the broader financial community. The Sustainability Accounting Standards Board (SASB) released standards for reporting and it is expected that the number of corporations voluntarily reporting will rise to 300 by next year. This is in addition to those reporting under the Global Reporting Initiative (GRI) standards.

What are the hurdles?

Despite the traction being gained by attention to ESG, there remain numerous challenges for the investor community that need to be addressed, such as:

• Disclosures are beginning to flow from corporations, yet there are no universally common standards, and reporting is voluntary.

• Disclosure standards for investment products (funds, ETFs) do not yet exist, although it is encouraging that the CFA Institute is currently developing a voluntary, global industry standard.

• Further requirements for disclosures will come at an administrative cost to corporations, which is yet to be quantified.

• Conflicts with fiduciary responsibilities have been questioned when considering non-pecuniary factors, as illustrated by the Department of Labor ruling on Oct. 30, 2020, regarding investment selections for ERISA retirement plans.

• Sufficient time has not passed to evaluate the long-term relative investment performance of including ESG factors in investment selection.

Yes, there is still important work to be done, but the growing number of interested investors suggests that consideration of ESG factors in evaluating investments is poised to be a significant trend for years to come. It’s an opportunity for people to bring together money and meaning. After the year we just experienced, many people are probably thinking it’s about time.


Perspective Guest 02

Suzanne T Mestayer is the managing principal at ThirtyNorth Investments, LLC. All investment strategies have the potential for profit or loss. ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

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