What is ESG Investing?

By Hightower Westchester on March 19, 2018

ESG stands for Environmental, Social and Governance.  ESG Investing is a term that is often used synonymously with sustainable investing, socially responsible investing, mission-related investing, or screening.  At Hightower Westchester we define it as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.

There is growing evidence that suggests that ESG factors, when integrated into investment analysis and portfolio construction, may offer investors potential long-term performance advantages.  ESG has become shorthand for investment methodologies that embrace ESG or sustainability factors as a means of helping to identify companies with strong business models.

ESG factors refers to industry specific key issues such as climate change, human capital and labor management, corporate governance, gender diversity, privacy and data security, among others.  ESG factors offer portfolio managers added insight into the quality of a company’s management, culture, risk profile and other characteristics.

ESG is growing in significance amongst both institutional and retail investors.  The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production, weapons and/or ammunition businesses or pornography.

Today, ethical considerations and alignment with values remain common motivations of many ESG investors but the field is rapidly growing and evolving as many investors look to incorporate ESG factors into their investment process alongside traditional financial analysis.

In recent years, adoption of ESG investing and asset growth has accelerated.  While many factors contribute to this growth, we believe that there are a few primary drivers of ESG investment:

The world is changing

Global sustainability challenges such as flood risk and sea level rise, privacy and data security, demographic shifts, and regulatory pressures, are introducing new risk factors for investors that may not have been seen previously.  As companies face rising complexity on a global scale, the modern investor needs to reevaluate traditional investment approaches.

Investors are changing

A growing body of studies suggest that millennials are asking more of their investments, especially if they incorporate ESG factors.  With that said, over the next two to three decades, the millennial generation will inherit trillions of dollars in one of the greatest transfers of wealth we have ever witnessed.

“We’re in the middle of a multi-trillion intergenerational wealth transfer from baby boomers to their children.  And those from their early 20s to 40 years old simply think about their investment decisions differently.”  Says Peter Lang, Managing Director & Partner at Hightower Westchester.

Data and analytics are evolving

With better data from companies, combined with better ESG research and analytics capabilities, we are seeing more systematic, quantitative, objective and financially relevant approaches to ESG issues.  Better data and analytics have paved the way for numerous studies that explore ESG investing

For example, MSCI ESG Research provides research and ratings on more than 6,400 publicly traded companies on a ‘AAA’ to ‘CCC’ scale according to their exposure to industry specific ESG risks and their ability to manage those risks relative to peers.

A common debate with ESG investing revolves around the idea that incorporating ESG factors into the investment process will hurt performance.  However, companies with robust ESG practices displayed a lower cost of capital, lower volatility, and fewer instances of bribery, corruption and fraud over certain time periods.  ESG incorporates the analysis of a company’s financial, environmental, social and governance practices as a means of determining the company’s ability to manage risk and produce strong, long-term investment performance.

In our next blog we’ll be exploring what ESG means to different people and how HighTower Westchester can work with you to align your values and your investments.

Richard Flahive – Private Wealth Advisor and Director of Research & Planning – HighTower Westchester
914.825.8639 – rflahive@hightoweradvisors.com