Hello and welcome to Radiant Wealth Planning, a fee-only financial planning and investment management firm exclusively for women. I’m Randa Hoffman, owner, and financial planner, and I’m located in sunny Newport Beach, California.
Today’s blog is a topic I’ve been hearing a lot from my clients which is the ask to have their portfolios created with investments that are socially responsible and supports their values, and the next thing I hear is that they’re willing to sacrifice returns as long as their money is going towards companies they want to support.
I want to first start by defining ESG and the difference between that and socially responsible, and I also want to touch on the belief that returns are compromised when you have an ESG or socially responsible portfolio. Is it an either-or situation?
What is ESG investing?
We can’t start talking about a topic without understanding what it means. Let’s start with ESG because it’s the highest level when looking at these types of investments. ESG stands for environmental, social, and governance. Each one of these categories has specific criteria that a company is measured against that then generates a rating or a score.
I want to talk about the rating for a minute because there are different rating companies, and each one has its metrics, calculation, and rating system, meaning there isn’t a standard metric. Why is that important to know? Because if you look at a company across 3 different rating agencies, you might get slightly different results. So let’s say you’re looking for an ESG ETF, it might be important to know which rating agency they’ve used to pick the investments for the ETF.
Environmental
The first part of ESG is Environmental. This looks at how a company impacts the environment, and if they see any environmental risks, how do they manage those risks. A few examples of some metrics could be how they dispose of hazardous waste, their energy use, pollution, and natural resource conservation.
Social
The S stands for Social and that’s related to the Company’s business relationships with: How do they treat their employees, suppliers, customers, and the communities where they do business in.
Governance
And the last one is Governance. This looks at the company’s executive pay, are their board of directors diverse, the transparency of their accounting and tax records, do they have good internal controls, and Shareholder rights.
Socially Responsible Investing
Socially responsible goes one step further than ESG by eliminating or adding investments based on specific ethical guidelines, like religion, personal values, or political beliefs. For example, an investor may want to eliminate investments related to alcohol, tobacco or gambling, but add investments that contribute to charitable causes.
Returns on an ESG or Socially Responsible Portfolio
Let’s talk about the returns you can get with an ESG or socially responsible portfolio. There is this misconception that if you have investments that are ESG then you’re not going to get any solid returns, and that may be true 10 years ago when it was only little solar companies were considered ESG, but that’s not true in today’s world. So what changed? Well, a lot of companies are working on their environmental footprint, their relationships with people they work with, and their governance. Not only do the companies want to do good, because it’s good to do, but what they’re noticing is by doing good’s attracting investors and customers. It truly is a win-win for everyone.
If you Google ESG companies you’ll see companies that are all different sizes and in all different sectors, and this is important because now you’re able to create a diversified ESG or socially responsible portfolio, which in return reduces your exposed risk and increases your return. Of course, this doesn’t mean that there aren’t market fluctuations or risks related to the company directly, of course, risks will still be there, but now the risks are spread across a lot of ESG investments and not just a handful.
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About the Author
Randa Hoffman is the owner and financial planner at Radiant Wealth Planning, a fee-only financial planning and investment management firm exclusively for women. She helps ease the uncertainty around retirement, tax planning, and transitioning wealth so that women can live a life they’ve always dreamt of. She holds an MBA and EA and lives in Newport Beach, CA.