Evidence Based ESG Investing

In my experience as a Financial Planner most clients are looking for a good return on their investments – let us call that investing for “Value”.

Others, however, might be looking to invest in line with their principles first with the return on investment being secondary – let us call that investing in line with their personal “Values”.

It might be thought that the two goals are mutually exclusive, but it is possible the invest in way to achieve both.

We call this “Evidence Based ESG Investing”

The Evidence based element is about building a portfolio that:

  1. Is globally diversified
  2. Is cost efficient
  3. Seeks to outperform the market without trying to outguess by using factors, such as tilting the portfolio to small and value companies.

The ESG element is about investing in companies based on the following standards:

  1. Environmental criteria considers how the company performs as a ‘steward of nature’.  This may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals.
  2. Social criteria examines how it manages relationships with employees, suppliers, customers and the communities where it operates.  This might include, for example, that the company donates a percentage of its profits to local communities, or encourage employees to perform volunteer work there. The company should have a high regard for company employees’ health and safety.
  3. Governance deals with the company’s leadership, executive pay, audits, internal controls and shareholder rights. Accurate and transparent accounting methods, and the ability for stock-holders to vote on important issues. Also ratification that there are no conflicts of interest in their choice of board members.

Combining these, we believe, provides the best of both worlds as the evidence we have seen is that incorporating ESG factors does not compromise returns.

So the investor receives:

  • Value – A return on investment i.e., to help them achieve their personal goals, and
  • Values – A positive impact in the world

Like any investment it is important to consider risks, term and accessibility needs of the investor.

ESG investing has been gaining in popularity in recent years and now with the addition of an evidence based philosophy we feel this is an ideal combination.

Warm regards

Neil

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