ESG: Smart Investing

ESG (Environmental, Social, Governance) investing has risen to around 20 trillion AUM and continues to grow as a part of the SRI ( Socially Responsible Investing) movement that has been going on for many years. Currently, there are three terms that have been used to describe this sustainable investing model: ESG, SRI and Impact Investing. Each has its own advantages and of course disadvantages. ESG is a more return-driven approach while Impact and SRI are more values-drive. I am going to attach a chart that will explain this a little bit more:

As you can see these investment strategies are very unique in their approach to sustainable investing. Impact investing is primarily about helping enact change and performance tends to be less prioritized. This is the reason we have not seen a wave of Impact Investing firms or a pivot in strategy from any investment firm in that way we have seen with ESG.

SRI wants to give individual investors the ability to invest in portfolios that they know aren't invest in companies like Big Tobacco, Oil, and Gun manufacturers. At the end of the day, you vote with your money and people should have more freedom to create diverse portfolios that aren't invested in the companies they see as morally backward. ETF's are a great example of how SRI is being used to offer more financial products that offer a diverse portfolio without including socially irresponsible companies. Blackrock, Vanguard, State Street (The three largest providers of ETF's) have expanded their product lines of sustainable ETF's in an attempt to offer solutions that give investors more freedom.

ESG differs from SRI in that they aren't simply excluding but they are building portfolios that use these factors and asses it as a risk when looking at the finances. For example, if you are building an ESG fund that excludes investments in Oil and invests more in innovative healthcare. Your choice to exclude oil is a sustainable one but it may also help you as a measure of risk. This dual-purpose is what makes ESG investing so unique to me. Including these issues in your risk analysis allows you to achieve two goals. The maximization of your portfolio returns and the betterment of society.

It seems to me that these ESG practices will begin to be adopted by every investment shop as a legitimate way to look at risk and build portfolios that are both sustainable and smart. I think ESG funds will become common practice in the world of hedge funds and banks. Young people are thrilled about this kind of investment and this is something that is growing at an unprecedented rate. I am excited to see where this will trend will go.