Many of today's investors are looking not only to generate returns on their investments, but also to align their investments with causes that are meaningful to them. This has caused the rise in demand for ESG investing.
What is ESG Investing?
ESG investing seeks to integrate environmental, social, and governance (ESG) considerations into investment solutions.
How do we classify and quantify ESG investing?
While taking into consideration environmental, social and governance issues may seem like a noble cause, there have proven to be some issues in measuring just how "ESG" a company or investment fund is. While one company may be deemed very socially responsible to one investor because of their commitment to gender equality, the same company may also be categorized as not socially responsible to another investor because of their lack of racial diversity initiatives.
As always in our investment making process, we like to use a academically-based, defined, repeatable metric to compare investment choices. This is why we like the methodology used by Dimensional Fund Advisors (DFA) for their environmentally sustainable investment options.
Dimensional evaluates companies using an emissions-focused sustainability scoring system that enables us to compare companies based on targeted environmental issues. This involves looking at companies across the entirety of a portfolio and within individual sectors.
For example, if the objective is to reduce a portfolio’s exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may be deemphasized or excluded from the portfolio altogether. An across-industry comparison of this nature provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by portfolio companies.
What is the environmental impact of an investor choosing sustainable investments?
Below you can see the reduction in greenhouse gas emissions intensity and potential emissions from reserves for the DFA Sustainability US Core portfolio compared to its benchmark, the Russell 3000 Index.
How do we still have a successful investment experience?
It’s important to note that we are talking about sustainable investing, not sustainable charity. The point of investing is to make a return on your money, not to donate money to causes or specific companies you believe in. We often speak with clients who are interested in sustainable investing and believe strongly in a specific company or brand and want to invest directly in that company. Investing directly in a single company can work out, but you also bear the risk of losing all of your investment, as there are systemic risks associated with owning individual stocks. Even when investing for ESG considerations, we want to make sure to have a broadly diversified, systematic investment approach.