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Combining Your Desire for Acceptable Returns with Your Passion for Social Change

Investment and Asset Management

By Christopher Bertinelli - Vice President, Asset Manager

ESG as an acronym is much more well known today than in prior years. But what does ESG stand for and why is it so common today? ESG, or Environment, Social, and Governance, represents an investment approach that focuses on companies creating value by improving the environment, addressing social issues, and/or promoting positive change within their organizations.

For Example:

  • Companies that are proactive with regards to the environment may not necessarily be working to develop renewable energy sources or to address climate change. They simply make it a priority to improve the environment while conducting their business. This might involve reducing their (and our) carbon footprint, eliminating emissions from their manufacturing processes, or finding sustainable replacements for plastic and other non-renewable materials.
  • Socially aware companies take an active interest in the communities they serve and the people they employ. They may contribute a portion of their profits to worthy causes and encourage volunteerism among their employees. They may also insist on superior working conditions at not only their own firms but also other companies in their supply chain.
  • Governance encompasses such issues as an employee, executive, and board diversity, fair compensation, and responsiveness to shareholders. In addition, transparency in accounting and other business practices is also a priority.

The ESG Evolution

Not too many years ago, socially conscious investors had little choice when it came with regards to putting their funds toward good causes. Socially responsive investment strategies existed, but they typically involved the elimination of companies or industries that investors found objectionable – tobacco, alcohol, and firearms, for example. While many investment professionals allayed the concerns of their conscience by adopting such an approach, their returns seemed to suffer.

Fortunately, this is no longer the case. Today, ESG investing has evolved beyond the limited scope of its socially responsive predecessor. It doesn’t just eliminate companies with dubious environmental, social, or governance practices; it includes those that are making a positive impact.

Perhaps the greatest evidence of increased investor acceptance is the introduction of indices that track the performance of stocks meeting ESG criteria. In recent years, such major financial companies as Standard & Poor’s and Morgan Stanley created indices that enable investors to compare the performance of these stocks with the overall market, as well as stocks of comparably capitalized companies around the world. The results may cause many investors to wonder if companies with ESG priorities offer more than alignment with their values.

S&P 500-ESG VS. S&P 500

The S&P 500-ESG Index, which launched in January 2019, generated a total return of 30% vs. 25% for the S&P 500.

 

 

 

 

Cumulative index Performance

USD gross returns (Sept. 2007-Dec. 2020). The MSCI ACWI ESG Leaders Index has outperformed its standard counterpart by 7.9% over 156 months.

Globally, it appears that stocks of ESG companies have captured the attention of investors as well. The chart to the right compares the performance of the Morgan Stanley All Cap World ESG Index (ACWI-ESG) with the Morgan Stanley All World Cap Index (MS-ACW). The former tracks the performance of 1,170 large and midcap ESG companies in developed and emerging markets around the world. The latter follows all 2,982 companies in those markets, ESG, and non-ESG. As you’ll see, from September 2007 – December 2020, the ACW-ESG outpaced its standard counterpart by 7.9%.

 

 

Clearly, past performance does not guarantee comparable performance in the future. However, many ESG companies are addressing risks that, if not mitigated, might adversely affect the future performance of their stocks – creating safe working environments, for example, or replacing resources used in their manufacturing processes. Moreover, some of these companies are investing in technologies that may become increasingly important in a new world that places much more value on sustainability, fairness, and transparency.

 

Adding ESG to your investment portfolio

At Lenox, we offer three ways for clients to integrate ESG into their investment portfolios:

  1. We conduct extensive research to identify third-party ESG investment managers with histories of strong risk-adjusted performance. These managers are responsible for day-to-day investment decisions necessary to structure and manage your portfolio.
  2. We recognize that some clients want to pursue a shareholder-activist approach. To meet this objective, we have engaged a leading proxy advisory firm2 to:
  • Keep you apprised of issues affecting the companies in your portfolio
  • Help you make more informed proxy voting decisions
  • Vote your proxy with greater simplicity
  1. We can apply screens to our investment selection process to eliminate companies, sectors, and industries that you do not want to be included in your portfolio.

Clearly, ESG is no longer an investment novelty, appealing primarily to investors whose social conscience outweighs their desire for potential returns. In this environment, you no longer need to sacrifice one for the other. Some companies with ESG priorities may be on the cutting edge of technology, developing electric cars, cleaner energy, or sustainable food sources. Others may be engaged in important social action, providing under-served populations with access to healthcare and affordable housing. Still, others may simply be solid corporate citizens who place a priority on diversity in their workplace, employee satisfaction, and safe workplaces. In that sense, it is no big surprise that ESG has become a key factor in the investment decisions of many Americans and, indeed, many Lenox clients. To learn more, contact your Lenox Advisor.

1 MSCI As of Dec. 31 2020. It is not possible to invest directly in an index. Index returns do not represent the result of the actual trading of investible assets/securities. Past performance is not indicative of future results, which may differ materially.

2 This service is optional and available by request.

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