With sustainable and impact investing assets accounting for a fourth of the total U.S. net flows in 2020, it is clear that environmental, social, and governance (ESG) investing continues to grow in popularity. Despite this rapid interest in ESG investing, the data remains inconsistent, and investors are wondering what metrics to use to measure ESG results. In this blog, we detail the current landscape of ESG metrics, explain how we at Wealthspire evaluate funds in this space, and provide resources that can be used by the everyday investor.
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
What is Impact Investing?
Aligning investment portfolios with personal values can come in many different forms (and many different definitions depending on who you ask). While ESG, impact investing, and socially responsible investing (SRI) are often used interchangeably, there are some subtle differences, which you can learn more about here.
At a high level, impact investing reflects the values of the investor and their specific social and financial goals through direct investment and engagement with companies.
How is ESG Investment Measured?
We consider several metrics to objectively measure performance and identify risk. For example, ESG ratings are designed to measure an individual company’s resilience to environmental, social, and governance (ESG) risks. These can help investors identify industry leaders and underperformers according to their exposure to ESG risk and how well they manage the risks relative to their peers. Different providers of ESG ratings include MSCI, Sustainalytics, and S&P Global.
Why Are Ratings Not the Same?
The challenge is that there is no consistent approach to these ratings. The methodology, scope, and coverage can vary greatly among providers, each with their own subjectivity and their own mix of “art” and “science”. They can use different metrics or weigh different issues such that each provider may evaluate the same company differently due to a lack of standardization. In addition, ESG ratings data can be deficient due to a lack of coverage or a dependence on self-reporting.
What’s an Example of This?
Clients have commonly asked us if Tesla is an ESG company, and the answer is – it depends on who is asking. Here’s why: Tesla is a good illustration of the disparity of ratings among ESG data providers. While some services give Tesla high ESG scores based on its environmental metrics, others rate it poorly based on its governance.
How Are These Metrics Evolving?
As the industry evolves, there is a growing focus on standardization, a trend we expect to continue. We applaud efforts by the Sustainability Accounting Standards Board (SASB), an independent organization that sets standards to guide the disclosure of financially material sustainability information by companies to their investors. Its standards identify the subset of ESG issues most relevant to financial performance in 77 different industries. Beyond helping publicly traded companies manage and measure ESG factors, SASB standards can also help individual investors by providing them with comparable, standardized data to inform their investing decisions.
How Does Wealthspire Evaluate ESG Metrics?
The goal for us at Wealthspire is to identify funds and index providers that lean on multiple sources for ESG ranking and scoring, with a greater focus on materiality.
- Materiality: The carbon footprint of an oil company is very different than that of a life insurer, and materiality helps identify those nuances
- Engagement: We look for funds that can demonstrate not only how/if they incorporate screens, but a pragmatic approach toward engagement (shareholder activism/proxy voting)
- Leverage Separately Managed Accounts (SMA): We work with managers who can tailor portfolios to our client’s specific impact goals
Where to Find These Metrics
In addition to the due diligence of our internal Impact Investing Committee at Wealthspire, we evaluate stocks and funds based on information from multiple providers. Here are a few free resources we find helpful:
- As you Sow’s “Invest Your Values” online tools
- US SIF’s Sustainable Investment Mutual Funds and ETFs Chart
- Your SRI
- MSCI ESG Ratings Corporate Search Tool
What’s Important is What Matters to You
We believe what matters most are the values of the investor. As each investor has unique values and goals, no one metric will determine if an investment is right for them. Our holistic approach to impact investing looks to understand the needs of our clients and use impact investing as a decision-making framework applied across a client’s entire portfolio.
Article By Emily Platt, CFP® – Wealthspire Advisors
Wealthspire Advisors LLC is a registered investment adviser and subsidiary company of NFP Corp.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2021 Wealthspire Advisors