We recently sat down to speak with Kathrin Kaiser and Matt Dattilio about ESG investing and what it means for you as an investor.
What is Environmental, Social, and Governance (ESG) investing?
KK: At the core, it is investing into funds that are more aligned with your values. There are different types of funds. Some are ESG-screened (meaning they don’t include companies that have ties to tobacco or weapons, for example) and some funds focus on certain sectors in a more positive way.
MD: It is an intense screening process where we try to take the entirety of the investment world and put it through ESG filters. In the industry, it’s called avoidance and advancement – the screening process avoids exposure to the companies that do not meet ESG criteria and advances exposure to those that do.
Who is it for?
KK: It was seen previously as an area where you would sacrifice on your returns, but now it’s much more accessible to everyone. The largest asset management firms in the world are now integrating environmental, social and governance criteria into their screening process, so ESG has come into the mainstream that includes companies that are stable in certain areas.
MD: It used to be much more of a niche area. Under a previous umbrella it was called Socially Responsible Investing (SRI). Most people were interested in clean energy companies and environmental areas. The portfolios were overweighed in this sector, which kept it in the niche status. If you went “green,” you gave up some return over longer periods due to the lack of diversification. But the shift to true ESG investing — how do companies treat their employees? What are their different environmental philosophies? What do companies say about climate change? What are its social goals? What are companies saying about Diversity, Equity, and Inclusion? — This has expanded what companies, and sectors are now included in ESG portfolios. These portfolios have been outperforming the funds that do not have these ESG screens on them over the past few years.
KK: As the industry grows, the funds get larger and it makes it much easier for us to trade them and offer clients more options that best meet their needs, which of course is the ultimate goal at MWM.
Is the strategy behind ESG investing different from “regular” investing?
KK: We use the exact same strategy that we do with traditional portfolios when doing ESG investing: Focus on the long-term goals of our clients and maintain a diversified set of investments at a low cost and tax efficient manner.
Where is ESG particularly “hot” right now?
KK: I have an interest from younger and more experienced clients. What I hear is “I don’t want anything to do with the stock market, where my 401(k) was all invested in fossil fuel companies.” I tell them that in fact there are a lot of different options out there. Education remains our best tool.
MD: The investor is becoming more educated, and everyone is much more aware of social and environmental topics right now. People are realizing that “Hey, I have a say in the investments I make. I can align my investments with the values I live every day.” It is intensely empowering for some clients to feel that sense of positive control over their finances for today and tomorrow. One interesting thing is that companies are being forced to change because the consumer is demanding it. Whereas one might avoid oil companies typically, sometimes it is in those very industries where we find the most change and the most effort to move companies into the 21st century values space.