By Brandon Perlow
ESG (aka Environmental, Social, and Governance) investing is a strategy that’s become more popular with investors who want to invest their dollars consciously. It looks at the bigger picture when assessing different companies, considering their overall ethical impact. Investors who implement ESG investing want to make their communities and the world a better place. They see social responsibility and financial success not as separate choices, but as part of a complete approach to investing.
Read on to learn more about the basics of ESG and how you can determine if it’s right for you.
The Basics of ESG Investing
ESG investing is a strategy that reviews the environmental, social, and governance practices of a specific company and assesses how those non-financial practices might impact the company’s performance in the stock market or external entities, such as the environment and our society. ESG aims to examine the total ethical impact of an investment, on both risk and return, and align investors’ portfolios with their moral values.
Because each investor has their own unique set of moral values, ESG can be difficult to define precisely. What is considered socially responsible to one may not be the same for another. According to the CFA Institute, the common consensus is that the different ESG factors are defined as follows:
Environmental
Environmental factors focus on the conservation of the natural world, including how companies manage their impact on:
- Climate change
- Carbon emissions
- Air and water pollution
- Biodiversity
- Deforestation
- Energy efficiency
- Waste management
- Water scarcity
Social
Social factors consider how companies interact with people at both the employee and the consumer level. This includes:
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labor standards
Governance
Governance refers to the internal structure of a corporation and the policies and procedures for how it operates. Governance factors include:
- Board composition
- Audit committee structure
- Bribery
- Corruption
- Executive compensation
- Lobbying
- Political contributions
- Whistleblower scandals
Understanding the Three Levels of ESG Funds
When it comes to ESG investing, there are three distinct levels of funds, each with its own approach and intensity of ESG considerations.
1. ESG Screened
The most basic level of ESG consideration, ESG Screened funds apply negative screens to exclude certain businesses or activities that pose ethical or environmental risks. For example, these funds might exclude companies involved in adult entertainment or child labor. ESG Screened funds aim to avoid the most controversial sectors while maintaining a broad investment base.
2. ESG Aware
ESG Aware funds go a step further by including positive screens, actively seeking out companies that are more environmentally, socially, or governance-conscious. The goal is to invest in businesses that are making a positive impact while keeping a similar risk profile to the overall market. At ABLE Financial Group, our ESG models predominantly use ESG Aware funds because they strike a balance between ethical considerations and risk management.
3. ESG Advanced
ESG Advanced funds prioritize positive ESG screens at the highest level, seeking to invest in companies that are leading the way in environmental sustainability, social responsibility, or good governance. While this approach can enhance the ESG impact of your investments, it can also increase risk. In other words, these funds place a higher priority on ESG criteria than on risk-adjusted returns. This most intense level of ESG investing is ideal for investors who are willing to accept higher volatility in exchange for making a stronger positive impact.
Getting Started With ESG Investing
Our ESG models emphasize environmental factors, with social and governance aspects as lesser considerations. This is because we have academic research that shows a prominent environmental factor when considering risk-adjusted returns. In other words, we know we can make a strong environmental impact while maintaining risk-adjusted returns. We don’t see that statistical significance with social or governance factors. Our primary measure of environmental impact is carbon emissions, specifically how many tons of carbon a company emits to produce $1 million in revenue. We have selected funds that emit significantly less carbon than their benchmarks.
All of our ESG models can be customized to fit a client’s personal risk tolerance and time horizon, just like our standard stock, ETF, and mutual fund models. We also align with 17 international sustainable development goals and offer a thematic choice within our ESG models. This means that if you are a strong believer in women’s leadership, or climate action, or water rights, we can incorporate your ESG preferences into your portfolio. The 17 sustainable development goals are:
Source: https://sdgs.un.org/goals
Reach Out to Us
Are you passionate about a cause or issue and believe that investing in responsible companies can benefit your portfolio? ESG investing might be for you.
At ABLE Financial Group, we’re committed to helping our clients integrate ESG principles into their investment strategies with a thoughtful and strategic approach. To learn more about ESG funds and how we can assist you, call 480.258.6104 or email adam@ablefinancialgroup.com today.
About Brandon
Brandon Perlow has a diverse background, originally hailing from Buffalo Grove, Illinois. He graduated early in 2008 with a Bachelor of Science, double-majoring in Political Science and History, with honors, from the University of Wisconsin-Madison. Following this, in 2010, he earned a Master of Science in Public Policy & Administration from the London School of Economics, with merit.
Between 2010 and 2013, Brandon worked in the private equity sector in Los Angeles, California. From 2013 to 2017, he engaged in public speaking across the United States, focusing on topics related to student travel and cultural intelligence (CQ). Impressively, Brandon has extensive travel experience, having visited all 7 continents and all 50 states before the age of 25. In 2018, Brandon transitioned to the financial services industry in Arizona, concentrating on investment planning and retirement preparation. Holding AHIP Medicare Certification, he brings his experience and education to clients of ABLE Financial Group. He previously served as a Financial Advisor at both Merrill Lynch and Prudential Advisors in Scottsdale and Phoenix.
Beyond his professional pursuits, Brandon is passionate about volunteering. He currently serves on the Board of Directors for Gesher Disability Resources in Scottsdale and the University of Wisconsin Hillel Foundation. He is also on the Board of Directors for the Alumni & Friends of the London School of Economics in the United States. In the past, Brandon has contributed to various boards, including the City of Scottsdale Loss Trust Fund Board of Directors, the Real Estate & Finance Committee of the Jewish Federation of Greater Phoenix, and Business B’yachad at Temple Kol Ami.
In his spare time, Brandon is an avid runner, hiker, and adventurer. In 2021, he ran over 1,000 miles and served on the Pace Team for the Rock n Roll Arizona Marathon and Half Marathon in 2020, 2022, and 2023. He has achieved remarkable physical feats, including summiting Mt. Kilimanjaro, the tallest mountain in Africa, and completing the Rim-2-Rim hike at the Grand Canyon. Brandon resides in Scottsdale with his wife, Laurel, their daughter, Naomi, and their rescue Siberian Husky, Laney.
