At One Day In July, we focus sustainable investing on the environment, recognizing the urgency of climate change and the tangible nature of the metrics available. We work to cut through the frenzied noise surrounding this growing field, while sticking to our basic principles: simplicity, low fees and personalized attention.
Ethics-driven investing is not a new idea. Reflected in religious traditions dating back hundreds of years (or longer), its modern incarnation took root in the U.S. during the active political climate of the 1960s and gained traction in subsequent decades as issues such as civil rights, nuclear weapons, and apartheid seized public attention. Investors were motivated to align their money more closely to their personal values, and to put it to work for the good of society.1
In general, socially responsible investing (SRI) aims to counter the long-dominant investment philosophy of maximizing shareholder value without regard to societal impacts such as environmental degradation, human rights violations, or corrupt practices. Historically, SRI methods relied primarily on screening out “sin” stocks – or entire industries, such as tobacco, gambling, or firearms. Today, however, investors are increasingly looking for a more nuanced view into the Environmental, Social, and Governance (ESG) issues that are directly relevant to a particularly company or industry.
This richer analysis has only become possible through the growing availability of data. As companies and governments expand their public reporting on ESG-related factors through annual reports, sustainability reports, proxy statements, and other forums, investors can glean a clearer understanding of specific concerns – whether looking at the use of renewable energy, employee-safety policies, or the composition of boards of directors.
E is for Environment
‘E’ stands for environment or for a company’s impact on the earth. Metrics may take into account the company’s carbon footprint, how it uses or conserves water, its response to regulatory changes, or the specificity of its reporting on climate-related goals. The goal is to better understand whether the company is a true steward of the natural world.
S=Social
The "S" in ESG looks at social components of companies and issues that affect people, both within the company and out in the larger world. Ratings may look at employee pay and benefits, working conditions, staff turnover, and the company’s public stance on social justice issues. This angle also examines the company’s business relationships, including those with suppliers, consumers, and local communities. This bucket includes many of the categories included in the classic “exclusionary” model of socially responsible investing, such as tobacco and weapons.
G Means Governance
The governance component of ESG looks closely at how a company is run. Rankings consider the leadership of the company, including executive compensation, the independence and diversity of directors, and stockholders’ ability to vote; the transparency of accounting methods; relationships and history with regulators; and the avoidance of any illegal practices.
Sifting through data has always been a challenge for ESG investors. In recent years, data sources have expanded to include more robust company disclosures, government databases, and academic datasets, all of which help develop far more sophisticated investment approaches. But available metrics don’t always align and may not be relevant to every industry, making it difficult to produce apples-to-apples comparisons of companies within an industry, much less across an investment portfolio.
Growing interest in ESG investing has also led to a rise in third-party research firms developing new ways to aggregate and analyze data, and to rank companies based on ESG factors. However, with no standardization of the data or agreement on which factors should be included or how they should be weighted, these firms can sharply disagree in their assessments. In fact, in one analysis, ESG scores generated by two of the top ESG ratings firms showed notably weak (32 percent) correlation.2 Rather than providing investors with sought-after clarity regarding ESG investments, results like this may make their choices more difficult.
We know, at least, that investors are increasingly using ESG criteria. At the end of 2017, more than a quarter of professionally managed assets in the United States ($12 trillion) incorporated some form of sustainable investing – a growth of 38% over two years – according to the nonprofit U.S. Sustainable Investment Forum. 3
Academic analyses largely indicate that ESG screens do not hurt financial performance. (See, for example, this 2015 article reviewing more than 2,000 previous empirical studies.) As Harvard Business School Professor George Serafeim concluded in a 2019 piece in Barron’s, “…even if you do not believe that ESG factors will improve performance, I haven’t seen any recent evidence that integrating material information about ESG will hurt performance.”5
And large financial institutions are touting ESG with growing confidence. In recent years, for example:
But it's also important to understand the caveats.
Available data are inconsistent and can be hard to parse. The impact and relevance of particular ESG factors can vary substantially by industry. Many ESG-focused funds are new, lacking solid track records. The performance of ESG funds may vary dramatically against conventional funds in any given time period, depending on a host of factors. And socially minded investors may choose other routes to make a difference – whether through advocacy, activism, or philanthropy.
At One Day in July, we’re interested in delivering a straightforward approach that will help you reach your investment goals. We believe in the promise of socially responsible investing and in the need for each of us to do our parts – but we will not discount our fiduciary responsibilities or our fundamental adherence to low-cost, diversified index funds.
Too many of the current ESG funds are untested, with track records that are far too short or fees that are simply too high. In addition, the maelstrom of ESG-related product offerings and data can often feel dizzying or irrelevant. Our goal – as it has always been – is to help cut through that noise to find meaningful ways to invest in sustainably focused funds.
Given the urgency of climate change, and the more definable nature of certain environmental metrics, our approach starts with environmental investing.
1www.jstor.org/stable/25074988?seq=1
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