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The ABC's of ESG Investing

December 1, 2018 | Commentary

  • Investing with an Environmental, Social and Governance (ESG) orientation has become a widely discussed topic lately. What this means exactly and how to best execute an ESG plan remains mysterious for many.
  • Early ESG efforts were almost exclusively negative screen vehicles, avoiding stocks and bonds of companies that engaged in industries or geographies contrary to an investor’s values. Later, positive screens were created that try to identify virtuous behaviors by corporations in order to overweight investments in those companies. Both screens have their challenges.
  • More recently an entire industry of ESG indices, funds and ETFs has appeared. Competing firms score thousands of public companies globally on a wide range of ESG metrics. The challenge has been on agreeing on how to measure and weight these metrics. Consistent measurement has been elusive to date.
  • “Impact Investing” is typically designed to direct private capital to specific industries and activities to achieve ESG. Some have claimed that they can earn superior returns while directing an ESG agenda. Others argue that any really effective ESG program will by definition sacrifice profits, but the improvement to society is worth the lower returns.
  • Another approach, which we dub the Hippocratic Oath strategy, says first do nothing in a portfolio that is contrary to an investor’s fundamental beliefs, and then invest to maximize returns. The investor is then free to use those profits anyway he or she chooses to try to achieve specific ESG goals. This has numerous advantages, not least being the donor should have more direct control over the ESG efforts versus being a shareholder or LP with limited influence over a company.

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