Is ESG investing right for you?

By Mac Ryerse, Responsible Investment, Columbia Threadneedle Investments

ESG performance has beat the S&P 500 for the past 2 years

Key Points

  • Firms that incorporate environmental, social and governance (ESG) considerations into their business plans are drawing greater investor interest.
  • Mutual funds that include the stocks of companies with an ESG focus may enjoy a boost to performance potential.
  • Ask your advisor how ESG investing may align with your investment objectives and financial goals.

A growing number of investors are looking to put their money to work in companies that prioritize environmental, social and governance (ESG) factors. The reason is simple: ESG investing not only helps support an ethical and responsible corporate community, but it can also be a positive investment-return driver over the long term.

Investors often raise two questions about ESG investing:

  • “How do I decide if incorporating ESG into my portfolio is right for me?”
  • “How will an ESG component affect my portfolio’s returns?”

Is ESG investing right for you?

To determine whether ESG factors are important to you, consider the following scenarios for each of the factors.

The environmental factor reflects how well a company’s policies consider the environmental implications of their business models. You can ask yourself: Would you rather invest in an energy company that’s using innovative, smart-grid technology to more efficiently consume electricity (and therefore offering competitive energy prices to consumers on a more global scale), or would you prefer to invest in one that doesn’t and potentially leaves the company vulnerable to litigation risks or increased regulatory oversight? If you answered the former, then the “E” in ESG may be important to you.

The social factor refers to how well a company respects its relationships with employees, other corporations and global citizens. For example, would you rather invest in a soft drink company that is researching healthy alternatives to combat obesity or one that directs its research and development dollars to other initiatives? If you chose the first, then the “S” in ESG may be important to you.

Governance is how well a company structures its oversight functions, including its corporate board. Would you rather invest in a company that’s well governed with women and men of various backgrounds who offer a range of perspectives? Or would you prefer one where the board members fit a certain profile and pedigree and share a similar mindset? If you select the first approach, then the “G” in ESG may be important to you.

How do ESG factors typically influence investment returns?

A common misconception about ESG investing is that while it may offer an opportunity to “put your money where your values are,” it can inhibit investment returns. When ESG investing first launched in the marketplace, that may have been true, as investors perceived it as an altruistic investment option that could mean sacrificing some return potential.

Today, the design and process of ESG investing have changed substantially, and the key is utilizing a disciplined approach to security selection when building an ESG-centered portfolio. As a result, ESG investing has become recognized as a source of positive total return potential. This makes sense intuitively because, from an ESG perspective, responsibly managed companies are more likely to keep their fiscal houses in order.

Implementing an ESG element into your portfolio

When first incorporating an ESG approach into a portfolio, you may want to consider beginning with your equity positions. Strategies that invest in company stocks (equity strategies) were some of the first to recognize the benefits of ESG factors. Equities are generally the part of a portfolio that can be most influenced by ESG factors.

An evolution is occurring, though: As asset managers and professional investors further educate themselves on the benefits ESG investing, ESG factors are becoming more commonplace across asset classes. For example, they are permeating municipal bonds, which naturally have a social benefit given they are often issued to fund projects and initiatives supporting residents of various cities and states.

Talk to your advisor about ESG investing

Talk to your Ameriprise advisor about how you want your portfolio to support your goals and values. Visualize what you want your investments to achieve. Is it more diversity in corporate boardrooms? Is it a greater focus on environmental factors?

You are in control of your assets. If investments that align with your values are important to you, a discussion with your advisor is a good step toward making ESG a more significant part of your portfolio.