Investing in ESG: Aligning Portfolios with Values

More recently, we can accommodate clients who want to express their environmental, social and governance (ESG) values through their investments. In doing so, our clients are joining a larger trend at play in the investment landscape. Indeed, ESG strategies have become a major force on Wall Street and beyond. Bloomberg, a provider of financial news and information, estimates¹ that global ESG assets could surpass $40 trillion by 2030 – representing a quarter of all assets under management. We believe this surge is driven by the desire to use investments as a tool to help shape a world that better reflects personal and collective values.

At its core, ESG investing allows investors to align their portfolios with specific environmental, social and governance criteria. This means one can choose to reduce or eliminate exposure to companies or industries that don’t align with one’s values. For instance:

• Environmental Impact: Some ESG funds might reduce (or eliminate) investments in companies involved in controversial activities such as drilling for oil, cutting down trees or creating problematic chemical byproducts.
• Social Responsibility: ESG funds might deprioritize industries that produce harmful products like weapons or tobacco, or steer clear of businesses whose supply chains may include child labor.
• Governance: ESG funds might screen out companies with poor corporate governance, for example those with non-diverse boards of directors, opaque accounting practices or murky political connections.

The beauty of ESG investing lies in its flexibility. Today, investors have access to a level of customization that allows them to align their investments closely with their values. Depending on one’s financial goals and personal principles, we typically recommend one of two approaches to integrating ESG into an investment portfolio:

1. Invest in ESG-Focused ETFs and Mutual Funds
   This approach involves purchasing mutual funds or exchange-traded funds (ETFs) that are built around an ESG philosophy. Some of these funds screen out businesses involved in controversial areas like civilian firearms, tobacco and thermal coal. This strategy is cost-effective and provides a straightforward way to align investments with values, though it may not offer the same level of customization as other options.
2. Create a Separately Managed Account (SMA)
   For those seeking a more tailored approach, we recommend working with one of our investment partners to set up an SMA. Rather than investing in funds, the SMA manager invests client assets in individual company stocks in a separate account with guidelines set by Wealth Architects. This option allows for deep customization based on specific values. Whether one wishes to avoid supporting factory farming, withdraw from companies engaged in predatory lending, or ensure investments align with religious beliefs, an SMA offers the flexibility to do so. While this approach may come with slightly higher costs, it provides a powerful way to make a more precise impact with investments.

A common question is whether ESG investing might reduce returns. The short answer, supported by academic research, is probably not by much, if at all over the long term.² It’s important to consider, however, that reallocating resources into ESG investments may trigger taxable events. A financial advisor can help evaluate the pros and cons as it relates to tax implications and other aspects of one’s financial-life plan.

For those interested in exploring ESG investing, our process is simple and client-focused:

1. Initial Consultation: The process begins by discussing the client’s interest in ESG investing, usually as part of a client review meeting. The advisor will review the financial-life plan and explore how ESG aligns with the client’s personal values.
2. ESG Questionnaire: The client completes a questionnaire that helps us understand which impact areas are most important. This step directs investments to clients’ prioritized values.
3. Tailored Investment Recommendation: Our investment team reviews the ESG questionnaire and analyzes the portfolio to craft a recommendation. Whether it involves selecting a few ESG-minded ETFs or setting up an SMA, we ensure that our advice aligns with our overarching strategy of holding broadly diversified portfolios over the long term.

It’s a good time to be an investor. We now have the option to weave our specific values into our investment strategy. As wealth managers, we are grateful for this possibility and believe it helps our clients live wealthier lives. If you’d like to consider ESG investing, please reach out to your advisor. For prospective clients you can schedule an appointment here.

Citations:
[1] Bloomberg Intelligence. “Global ESG Assets Predicted to Hit $40 Trillion by 2030 Despite Challenging Environment, Forecasts Bloomberg Intelligence.” Bloomberg, 8 Jan. 2024, www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030-despite-challenging-environment-forecasts-bloomberg-intelligence.

[2] Morningstar. “ESG Portfolios and Returns.” Morningstar, www.morningstar.com/views/blog/esg/esg-portfolios-returns. Accessed 8 Oct. 2024.

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The information provided in this commentary is intended to be informative and not intended to be advice relative to any investment or portfolio offered through Wealth Architects. The views expressed in this commentary reflect the opinion of the author based on data available as of the date this article [essay] was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided in this commentary is not a solicitation for the investment management or other services offered by Wealth Architects. References incorporated into the report [essay] from third party sources are as of the date specified and are believed to be reliable. Wealth Architects is not responsible for errors in the third party data.