ESG Investing: 3 Questions to Ask Your Financial Advisor
When it comes to investing, there's no foolproof method for ensuring the highest returns. But you can feel good about where you put your money if your investments align with your personal beliefs.
Environmental, social, and governance (ESG) investing is also known as socially responsible or impact investing. It has grown in popularity in recent years as investors recognize that the financial performance of an organization is increasingly affected by environmental and social factors.1
But if you're new to ESG investing, it can be tough to know where to start. If you're interested in incorporating ESG principles into your portfolio, here are a few questions to ask your financial advisor.
What Is ESG investing?
ESG investing is an approach to investing that considers factors beyond financial performance and risk. While the precise definitions might vary, ESG factors2 generally include:
- Environmental. This can include anything from a company's greenhouse emissions to whether it sources sustainable materials.
- Social. This may refer to how an organization treats its employees, suppliers, and customers. It can also refer to community engagement and philanthropy.
- Governance. This relates to corporate leadership, oversight, political contributions, and accountability. That can encompass everything from executive compensation to financial reporting and board diversity.
Of course, one size doesn't fit all, and the elements that matter to you may vary. The best approach is to work with your financial advisor to identify the issues that matter to you the most. And then figure out the investment strategy that best meets your goals.
According to one study, companies with a better ESG rating tend to be larger in market capitalization and have higher earnings and dividend yields.
How Do ESG Factors Impact Portfolio Performance?
Does incorporating ESG factors into investment decisions enhance returns, or does doing good with your money come at a cost?
According to a study by Morningstar, companies with a better ESG rating tend to be larger in market capitalization and have higher earnings and dividend yields.3 But most studies on how ESG factors drive markets don't have a lot of historical data to pull from. This can make it difficult to score a company on its ESG characteristics. For example, a company might get high marks for its sustainability efforts but make headlines for its poor treatment of employees.
Measuring the pros and cons can be highly technical, but your financial advisor can review any available data. They can also help you develop a portfolio that balances risks and potential rewards and aligns with your time horizon and liquidity needs.
How Should I Approach ESG Investing?
Your goals and values are unique to you, so your approach to ESG investing will be unique as well.
There are generally three approaches to implementing an ESG investment strategy:4
- Negative screening. Identify companies, sectors, or funds that don't align with your values and remove them from your portfolio. For example, you may choose not to buy stock in a tobacco company—or pharmaceutical manufacturer that produces opioids—no matter how well the stock performs.
- Norms-based screening. Exclude from your portfolio any companies or government bonds that don't meet internationally accepted norms. This could include United Nations treaties, Security Council sanctions, or Organization for Economic Cooperation and Development (OECD) guidelines. For example, there are currently 14 U.N. Security Council sanctions regimes5 in place around the world. These sanctions are meant to address issues such as conflict resolution, unconstitutional changes in government, exploitation of natural resources, and support for terrorist groups. If you engage in norms-based screening, you might opt not to invest in government bonds from those countries.
- Positive screening. Actively invest in companies, sectors, or funds that align with your goals and values. For example, if you are concerned about climate change, you may want to allocate some of your money toward funds that screen out companies holding fossil fuel reserves, invest in companies with a low carbon footprint, or buy bonds that are linked to environmentally beneficial projects.6
Whichever route you choose, your financial advisor can help you find opportunities for returns that align with your personal beliefs and values. If you have any other questions on sustainable investing or would like to start incorporating these factors into your portfolio, reach out to your Synovus financial advisor to discuss.
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- R. Boffo and R. Patalano, “ESG Investing: Practices, Progress and Challenges," OECD Paris, 2020, accessed February 24, 2022. Back
- CFA Institute, “ESG Investing and Analysis," accessed February 24, 2022. Back
- Madison Sargis and Patrick Wang, “How Does Investing in ESG Companies Affect Returns?" Morningstar, published February 19, 2020, accessed February 24, 2022. Back
- Principles for Responsible Investment, “An Introduction to Responsible Investment: Screening," published May 29, 2020, accessed February 24, 2022. Back
- United Nations, "Security Council Sanctions: From Blunt Instrument to Vital Tool," published February 7, 2022, accessed March 9, 2022. Back
- Annie Nova, "Here are some investing options for 2021 - with climate change in mind," CNBC, updated January 14, 2021, accessed March 9, 2022. Back