Socially responsible investors encourage corporations to reflect the values set forth in the ESG criteria when choosing investments. Stewarding nature, caring about the management of people and relationships, and valuing racial and gender diversity is essentially what SRI is about but we want to explain a bit more about ESG and its role when looking at investments through this lens.
SO WHAT IS ESG?
ESG are additional criteria used to evaluate investments. They allow investors to better align their principles with their portfolios and see financial returns, while also seeing how their investments impact the environment and society.
ESG is now on the cusp of experiencing significant growth as we see issues of earth, human rights, corporate leadership and diversity needing a new evaluation. In light of Covid-19, it’s possible that a heightened awareness to these issues will increase the importance of ESG in our financial evaluations. Research continues to show this. McKinsey among many others have reported that diverse organizations perform better.
E IS FOR ENVIRONMENTAL
The Environmental component requires research into a variety of elements that illustrate a company’s impact on the Earth. Are they a good steward of the environment?
Environmental topics to research and analyze include:
· Recycling and safe disposal practices.
· Gas emissions, biodiversity, waste management, water management
· Climate change policies
· Environmental benefits for employees such as cycling programs and environmental-based incentives
· Greenhouse gas emissions goals
· Carbon footprint and carbon intensity
· Usage of renewable energy including wind and solar.
If you are evaluating an investment and want to see how it scores in the environmental arena, Fossilfreefunds.org shows a rating on the fund. Here’s an example of an A rating fund: Rating on Nuveen.
EXAMPLE: Nike (NYSE:NKE) is a company that meets the environmental criteria of ESG. A leader in environmental dedication, Nike has a chief sustainability officer that oversees its many environmental efforts.
S IS FOR SOCIAL
The social component consists of people-related elements like company culture and issues that impact employees, customers, consumers, and suppliers — both within the company and in greater society.
Social topics to research and analyze include:
· Employee treatment, pay, benefits, and perks
· Employee training and development.
· Employee safety policies including sexual harassment prevention.
· Diversity and inclusion in hiring and in awarding advancement opportunities and raises.
· Mission or higher purpose of the business
· Consumer friendliness and customer service responsiveness
· Public stance on social justice issues, as well as lobbying efforts.
EXAMPLE: Accenture (NYSE:ACN) has an admirable workplace approach. Accenture pays close attention to its diversity and inclusion in its workforce.
G IS FOR CORPORATE GOVERNANCE
The corporate governance component analyzes how corporate management and boards relate to different stakeholders, how the business is run, and whether the corporate incentives align with the business’s success.
Governance topics to research and analyze include:
· Executive compensation
· Diversity of the board of directors and management team.
· Proxy access.
· Transparency in communicating with shareholders
· Relationship and history with the U.S. Securities and Exchange Commission (SEC)
EXAMPLE: Intuit (NASDAQ:INTU) satisfies many of the attributes in the corporate governance category. It has achieved a 40% diverse board, one of the highest levels in corporate America today.
ESG investing is gaining traction because we are living in an age that these core values are demanding attention by our world. Research is increasingly showing that this investing method allows you to put your money where your values are and experience positive returns.
Written by Carrie Eacker, the Director of Operations at Cascade Financial Strategies. CFS is a registered investment advisor licensed in Oregon, California and Idaho. They specialize in socially responsible investing which integrates environmental, social, and corporate governance (ESG) criteria into portfolio construction.