The investment world is full of acronyms and buzzwords, and right now you keep hearing about ESG, CSR, SRI, and several others. What do these acronyms mean and why do they keep coming up in news stories and web posts?
ESG stands for Environmental, Social, and Governance, while CRI stands for Corporate Social Responsibility, and SRI stands for Social Responsible Investing.
There are many other names and acronyms being used, but effectively they all are an evaluation of a firm’s collective conscientiousness for social and environmental factors. Environmental concerns such as climate crisis or sustainability (the depletion of raw materials or recycling programs and considerations in a company’s products) can play a part in a firm’s attractiveness as an investment.
Social concerns such as diversity in an organization’s workforce, their commitment to human rights via where they outsource their supply chain, animal rights, and consumer protections can be considered. Corporate governance takes into account the corporate behavior of the executives of an organization, measures the business ethics, anti-competitive practices, and corruption of the firm.
While the global pandemic has highlighted supply chain issues, growing concern about climate change has also influenced investor decisions and heightened engagement of groups previously less involved in traditional investing. This has contributed to the ESG investing boom. Local, federal, and international regulations have been in place for years and will continue to evolve to address current circumstances which affected organizations must comply with, but in addition to legally required commitments, firms are now evaluating their environmental, social, and governance in a way to determine how it affects their attractiveness to investors.
ESG does not appear to be a trend in investing, it is something entirely different. It is an evolution of investment strategy itself. There has been a shift in how companies and investors view ESG factors and the importance they attach to them relative to other investing considerations. Many companies are looking to do more to incorporate ESG considerations into their business strategies to strengthen their bottom lines and to raise their profiles with investors.
A recent paper titled The Cost of ESG Investing by ASU finance professors Laura Lindsey, Seth Pruitt, and Christoph Schiller found that even as interest in ESG mandates grows, ESG strategies have little to no impact on investment returns. ESG tilted portfolios do not perform significantly worse than non-ESG portfolios, but as ESG scoring becomes more standardized, returns of ESG tilted portfolios could surge due to the coordination from the markets or regulations.
According to the Forum for Sustainable and Responsible Investment, U.S. assets under management using ESG strategies grew to $17.1 trillion at the beginning of 2020. That’s a 42 percent increase from $12 trillion at the beginning of 2018. If you would like to include ESG investing in your portfolio and would like a complimentary consultation, please feel free to reach out to me to schedule a quick virtual meeting.
The above is the opinion of the author and should not be relied upon as investment or legal advice or a forecast of the future. It is not a recommendation, offer, or solicitation to buy or sell any securities or any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes, and opinions are assumed to be true and accurate. Grand Canyon Wealth Management does not warrant the accuracy of any of these.
Michael J. Day CPA, PFS™ is the founder of Grand Canyon Wealth Management where he provides financial planning, estate planning, wealth management, insurance, and investment services. For more information, or to schedule a complimentary consultation, visit grandcanyonwealthmanagement.com, call (480) 590-3590, or e-mail Michael.j.day@lpl.com. You may also follow him on Twitter @GrandCanyonWM. Securities and advisory services provided through LPL Financial, a registered investment advisor member FINRA/SIPC. Grand Canyon Wealth Management is not an affiliate company of LPL.