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Investing as Future-Building: How Investors are Approaching ESG Investing


Investing is not just about money—it’s about the future. Investors shape the future they envision through their contributions, and the cultural and social movements of the time dictate that vision in several ways. The sustainable bandwagon has been circling the block for some time now and has officially trickled into the world of investments. In 2019, the S&P 500 ESG Index marked an evolution in the realm of sustainable investing by creating the environmental, social, and governance framework through which people define their portfolios.


In other words, the move towards sustainable investing has become much more defined and—through the Biden administration—encouraged.


Understanding the Movement of ESG Investing


The Department of Labor’s contention is that companies not overly reliant on fossil fuels are better positioned for the future, as climate change contributes to significant economic consequences related to supply chains, disruptions of productivity, and other effects.


The philosophical underpinnings of ESG investments are based on two premises:

  1. Investors seek to put their money where their ethical standards are and invest in companies that improve quality of life, sustainability of the planet, and equality

  2. Companies that operate under those auspices will inevitably produce bigger returns.

The principal idea is that companies implementing these forward-thinking metrics have long-term strategies embedded into their operations and will then do better by doing good.

The pillars of ESG relate to:

  • Environmental: This relates to a firm’s impact on the environment in terms of waste, pollution, etc.

  • Social: Relating to a company’s impact on society and its stakeholders.

  • Governance: This relates to the firm’s governance structure as it relates to transparency, accounting policies, board diversity, and other factors.


Source: S&P Global


The Shifting Policies on ESG Investments

Under this mindset, the Biden administration is walking back Trump-era policies and, in fact, encouraging investments using frameworks, such as the ESG triumvirate. The Trump administration had a rule requiring 401(k) plans and pension funds to make investment decisions solely on economic factors.


On October 13, 2021, the U.S. Department of Labor proposed a rule that would remove the barriers in considering environmental, social, and governance factors when selecting investments and/or exercising shareholder rights.


Understanding ESG Metrics

One way that investors measure a company’s dedication to ESG principles is through defined metrics via the S&P 500 ESG Index. These scores are based on various data. The specifics on how these data points were collected and categorized is a story for another day, but needless to say, the construction of the scores consider several factors including (but not limited to):

  • Extracting or generating electricity from thermal coal accounting for greater than 5%

  • Producing tobacco or deriving more than 10% of revenue from tobacco-related products

  • Involvement in controversial weapons including biological or chemical weapons, depleted uranium weapons, etc.

Other institutions including Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-Related Financial Disclosures (TCFD) are also working to form standards and facilitate these ideas into the investment process.


For example, companies like Tesla are rising slowly in the S&P 500 ESG scores. The visionary automaker is not reviewed in a vacuum, however; they are compared to their peers in the automotive industry including General Motors Company, Ford Motor Co., and others. In May of 2021, for example, Tesla officially joined the S&P 500 ESG Index due to its improvement in several markers.


The Bottom Line of ESG Investments — Is it For You?


As an investor or someone with a 401(K), the question becomes, is this type of investment for you? And, like many things in the financial world, the answer is: it depends.


For some investors, there is an urgency to support causes that are important to them. In some ways, they view investments as part of their legacy. For younger investors like millennials, these causes have been embedded into their worldview. So regardless of your personal views, investing in companies that work for a better future may not only be an ethical priority but a wise financial decision given the externalities. That’s because companies with ESG initiatives have a lot of potential when it comes to future government support and improving energy solutions for the future.

Still, the answer is not clear-cut.


We reviewed these considerations in a past post about ESG investments in retirement.


Invest Wisely, Consider the Options, and Talk to a Professional


The world of ESG investing is quickly growing. Regardless of an investor’s view of the future, data points often provide insight into what direction the financial world is shifting. Understanding these movements can help you survey the landscape and make the right decision for you.


There’s a lot at stake here. Your investments, your retirement, and your future.


So, what direction is right for you? Speak with someone who can guide the way. Call TrinityPoint Wealth today.

 

This material prepared by TrinityPoint Wealth is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by TrinityPoint Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. TrinityPoint Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information may have been condensed or summarized from its original source. Materials herein were prepared by AGI Marketing. TrinityPoint Wealth and AGI Marketing are not affiliated.