I didn’t study finance in college or really even have much of an interest in finance until I started working at KWB Wealth. I received a bachelor's degree from UC Berkeley in Conservation and Resource Studies where I took courses in restoration ecology, environmental ethics, and urban agriculture. Oh, and I did take a course in environmental economics my sophomore year (so I guess I did have some exposure to the finance world!)
I really enjoyed what I learned through my coursework and intended on pursuing a career in sustainable agriculture. But when you set sail, wind shifts, weather occurs, and sometimes you change course. I ended up pursuing a career in financial planning, but my enthusiasm and dedication to sustainability and environmental stewardship still persists. I may not be out in the fields restoring the soil or on the senate floor introducing environmental legislation, but I am making my voice heard, just through a different tool: my investments.
Over the last few years, there’s been a big push towards Environmental, Social, and Governance (ESG) investing. As we all know, money talks and how we use it in the world really does have an impact. My generation has been big on buying products from businesses we believe in because we want to support the ideas and ethics we value. So, we’ve seen big pushes to support local business and certified B corporations.
While purchasing from these businesses is a great way to vote with your dollar, ESG investing is an alternative strategy that doesn’t require as much personal consumption.
So, what exactly is ESG investing?
ESG investing involves three factors and measures their impact with the following criteria:
Environmental: analyzes how a company mitigates greenhouse gas emissions, whether they create sustainable products, how they recycle and use natural resources.
Social: factors in whether the company is involved it its community, participates in community development, considers diversity and equal opportunity in its hiring process, and supports human rights nationally and globally.
Governance: refers to a company’s diversity in management, responsiveness to shareholders, and participation in lobbying and corruption.
My investment portfolio is ESG focused, because I decided early on my investment strategy will align with my ethics and the future I want to see for our world. I also know that from a behavior finance perspective, investors are likely to stick to a strategy they believe in. And if you stick to something, the long-term return will be rewarding!
There’s a common misconception about ESG investing and returns. Financial professionals and investors tend to believe that ESG portfolios won’t match up with traditional portfolios in regard to return. However, a recent report by Morgan Stanley showed in 2019 sustainable equity funds outpaced traditional funds by a median 2.8%. They also considered the beginning six months of 2020 and found the sustainable funds weathered the global recession and market volatility better than their traditional counterparts. Sustainable ETFs and mutual funds outperformed by 3.9% during the six-month time frame. Now, their performance was still in the negative just like the rest of the market, but they provided more downside risk protection than their counterparts. The report also found that in any given year from 2004 to 2018 the median performance of the ESG funds were in line with traditional investment funds, but during the turbulent market years they consistently show less downside risk.
In my opinion, the “financial trade off” most investors think about when investing in ESG funds is no longer relevant. Investors are seeing comparable returns with ESG investing, and as environmental regulations get stronger and as investors demand for increased social responsibility from corporations, opportunities will continue to arise. The movement towards sustainable energy, equality in the workplace, and corporate responsibility isn’t going away. As people, as investors, we should be asking corporations and businesses to treat their employees well, offer benefits, and have diversity on their board of directors. These are business practices that will hold up better in the national and global economy because they care about more than profits: they care about their workforce, their environmental impact, and how they show up in their community. And if a lot more people can benefit from a businesses’ success, that’s a positive return that trickles down beyond the executives and shareholders.
As investors, we have more power than we think in the market and economy. When we purchase ETFs, mutual funds, or stocks, we become shareholders of the company. And as shareholders, we get to vote on business matters and participate in the profits. My conviction is held in the saying that one can do good by doing what’s right. So, the next time you look at your portfolio, or meet with your financial advisor, find out what companies you’re invested in. And ask yourself, do you align with the company's values? Do you agree with how they do business, how they treat their employees? Then from there decide if ESG investing is for you. Companies can do good by society and the environment while still making a profit. Where you decide to put your money is a vote for the type of capitalism you want to see in the world.
My one caveat to this investment approach is that it really must be something you believe in. Again, the best investment strategies are the ones you stick to! I’ve had success in ESG investing because I’ve stuck to it, it’s my long-term strategy, and I’m emotionally invested in the company’s success and how they get there.
If you have questions about ESG investing or want to learn how to incorporate ESG investing in your portfolio, please reach out! This is my passion, and this is how I make my money talk. Let me know if you want to join the movement.~ Rachel Bubb
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.