This page outlines ESG Investing. For a description of Passport Wealth Management’s financial planning services, please click here.
ESG investing focuses on three specific factors: environmental, social, and governance. ESG investing means purposefully investing in companies that meet certain criteria with respect to their use of resources (environmental), how they are run (governance), or their impact on employees and society (social). It is not new, but it is growing in popularity and over the past several years as investors recognize these factors can impact a company’s performance in the marketplace. At Passport Wealth Management, these factors are a part of our investment management approach. To learn more about our investment planning services, please click here.
Factors involved in ESG Investing
How companies deal with international, national, and regional environmental regulatory requirements can say a lot about their ability to adapt to a rapidly changing world. Is the company taking unnecessary risks about regulations, compliance, and best practices that open it up to risk in the long-term? While a Board may decide that the benefits outweigh the risks, an investor may not.
Social factors for investing have a far more critical impact than one might expect from the name. It deals with three sub-areas, all of which can impact a company’s profitability and long-term adaptability:
- Consumers: customer satisfaction, data protection, and privacy;
- Employees: employee engagement and retention, leadership, labor practices, and employment standards; and
- Outsiders: community relations, and relationships with other industries.
How well are these companies run? This piece of the puzzle looks at the composition of their boards of directors, their audit committee structure, their record on bribery and corruption, how they compensate their executives, and how they deal with whistleblowers. We can expect that “good governance” generally leads to better-run companies, producing returns that are in line with—or are sometimes even better than—the rest of the market.
Use of data in ESG investing
Many financial planners and savvy investors seek out funds that make use of ESG data. Research increasingly shows that ESG portfolios perform similarly to non-ESG portfolios, and that incorporating ESG data may even provide an improved return over the long run. Think of this data as a GPS system compared to an old map and compass, it’s not necessarily better, it’s just more information. Some market professionals believe that this information may also result in less risk since ESG funds could help weed out companies that are a greater financial risk due to their governance, environmental, or social practices. This is called improving the risk-return profile.
Guided by each client’s individual Investment Policy Statement (IPS) we develop at the outset of our relationship; Passport Wealth Management regularly incorporates ESG data into investment management decisions about client portfolios.
For more information on our investment management philosophy, ESG investing, or holistic financial planning, please give us a call at (704) 457-0060. Passport Wealth Management works with clients around the world from our offices on the shores of Lake Norman in North Carolina.