There has been a lot of buzz, both positive and negative, around sustainable investing recently. So, why and how are Environmental, Social, and Governance (ESG) principals relevant to the investment selection process? For the research team at BMG, we look at ESG in two ways, managing investment risk and leveraging trends.
ESG investing is not activism but rather a method to identify risk factors around the globe that are having an impact on your investments. Data shows that companies taking ESG principles into account are often rewarded on their bottom line. In the United States, research from Calvert shows a correlation between diverse corporate boards and increased profitability. Also, companies that are more efficient using resources often have a competitive advantage through lower costs and less sensitivity to commodity price volatility. So, it is no surprise that data from Morningstar indicates over the last 10 years, 80% of ESG investments have outperformed their respective benchmarks with less volatility.
Ten years ago, it may have been easier to write off sustainable investing as a fad and many pundits still try to dismiss the shifting desire of investors to favor more sustainable investments. Although BMG has been researching and using ESG as a component for years, huge investment managers such as BlackRock, Fidelity, Vanguard, and many others have embraced the concept as well. The shift has been dramatic with nearly one third of global investments including some aspect of ESG.
Demand has also been bottom up with companies having an incentive to listen to stakeholders. ESG is viewed as a key part to long-term value creation. The ability of corporate boards to address risk and guide business decisions in a way that helps generate lasting benefits is fundamentally positive. This creates an environment where all involved, from employees to customers, and especially shareholders, gain value.
However, ESG is not a one-size-fits-all approach, and we are very critical of where and when to use it. In fact, not all of the investments we use are ESG specific and this includes our four ESG driven strategies.
So, why does all of this matter? Quite simply, the goal is better risk adjusted outcomes for investors over the long-term. ESG, as a component of research and due diligence, cannot be overlooked.
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Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Stock investing includes risks, including fluctuating prices and loss of principal.