If 2020 was the year that changed personal life, the workplace, and how we view health and safety, it may also be the year we hit another tipping point – in how we invest.
Between April and June, when the COVID-19 pandemic accelerated around the world, funds that prioritize ESG investment (buying shares in companies with an environmental, social and governance mission) saw global asset management drop in a record $ 1 trillion, according to Morningstar. That was due to net inflows of $ 7.1 billion in those three months alone.
The best-known funds in the US include the Vanguard FTSE Social Index Fund (+ 11% to date, as of Oct. 8), which excludes stocks in adult entertainment and tobacco companies, among other sectors; the Parnassus Endeavor Fund (+ 5.26% to date), which excludes some sectors and emphasizes companies with good workplaces; and GDB’s Sustainable Energy Fund (+ 26.38% to date), which focuses on renewable and sustainable energy companies.
Two of the three funds, Vanguard FTSE Social Index and BGF Sustainable Energy, are far outperforming the S&P 500 this year, while the Parnassus Endeavor Fund is in line with the benchmark S&P 500, both of which are up just over 5%. in 2020 (as of October 8).
ESG experts say the events that defined last year’s generation, from the pandemic to the racial justice protests and the West Coast wildfires, have only helped fuel the momentum that was already there.
“I think now we are at a time where ESGs will be mandatory for the core portfolio,” says Michael Herskovich, director of corporate governance at BNP Paribas Asset Management in Paris.
However, getting it right requires a clear vision, a strategy, and a lot of skepticism.
Here’s how to get started.
“ESG is very personal,” says Robert Jenkins, Refinitiv Lipper’s director of global research. After all, ESG investing requires you to make a bet, so to speak, on your securities. And with so much money at stake, you have to honestly analyze what it is that matters to you.
While some experts note that high ESG scores can be an indicator of a forward-thinking management team (and, at least before COVID, that translated into relatively low volatility), others note that many companies are difficult to find. Check each E, Box S and G.
Once you are clear about your investment budget and the risk you can tolerate, limit it to questions like: Do you value a low carbon footprint? What about the diversity of the board? Do you mind?
If you choose “low carbon,” for example, consider whether you want to focus on eliminating companies with a high carbon footprint. Another consideration: Do you want to use your investment as a club to drive companies to invest in cleaner operations or reexamine their supply chains?
These are the kinds of questions great fund managers have in mind. It is also important to know where you stand on these issues.
Whichever route you choose, be prepared to do some research. (Sorry, passive investors).
To complicate matters, ESG investing has long struggled with a lack of transparent, regular, and standardized information that allows you to truly compare apples to apples.
However, that becomes easier as an increasing number of mission-based mutual funds and NGOs do more and more work for ESG investors. For example, some publish comparable ratings to help you verify emission reduction targets.
That said, ESG investing may require you to dig far beyond a company’s annual reports and earnings projections.
Kirsten Snow Spalding, senior director of programs for the Investor Network at Ceres. Also see if the goals are clear, measurable, and short-term. The current CEO won’t be there when it’s time to see if a company reached its goal of “net zero by 2050,” says Cynthia Cummins, director of private sector climate mitigation at the World Resources Institute.
You need information on how they are going to achieve that goal and what their goals are in the years leading up to 2050.
What if the objectives are confusing? That can also be a red flag, experts warn.
