HCR Wealth Advisors Discusses How the Pandemic Has Influenced ESG Investing
Polarization marks almost every aspect of our lives in the U.S., from politics to culture to economic theory.
So, it’s no wonder investors have looked inward at personal belief systems and considered more investments that support their values. HCR Wealth Advisors has seen this trend grow as its clients ask more often about socially responsible investing, or SRI.
There has been a shift in how investment dollars are being used. For years, people focused on penalizing bad actors when companies caused oil spills or falsified auto emissions tests. It was easy to identify those companies when they were Dow component companies, for example. But what about the other companies whose bad behavior never reached the nightly news?
Entire countries and industry segments were also targeted. For years, investing in companies active in South Africa under apartheid faced a boycott. And tobacco companies were pariahs for the harm done to people by cigarettes.
But today, investors are less interested in punishing misdeeds than they are in motivating companies trying to effect positive change. They are looking for good corporate citizens.
This investing space is known as ESG. Participants consider a company’s Environmental, Social and Governance factors, in addition to traditional metrics such as earnings growth potential and balance sheet strength. HCR Wealth Advisors has watched this space transform from a buzzword ten years ago to a more prominent part of the investment community, according to Michelle Katzen, CFP®, an HCR Managing Director.
What complicates this type of investment for the individual investor is having some form of a scoring system that would let a person quickly assess (and compare) how different possibilities rank. Most available information is generated by competing third-party ESG rating services, where each one uses its own method to collect and score ESG data.
For now, investors grapple with what each company is measuring, if anything. Here are some considerations under the three major umbrellas:
- Environmental — consideration of climate change, levels of pollution and waste, stress on natural resources, and environmental opportunities such as renewable energy.
- Social — the use of human capital, justice issues, controversial sourcing, product liability issues, and access to social support.
- Governance — corporate governance around its ownership and its board, and corporate behavior around ethics, corruption, and instability.
And now, enter the coronavirus
Suddenly, the pandemic and its destruction have led us to revisit our values. Investors are asking themselves if the pandemic isn’t the first “sustainability” crisis of this century. For many, it has renewed the focus on climate change and is acting as a wake-up call to raise the priority of sustainability when making investment decisions.
On July 1, 2020, JPMorgan Chase released a report, “Why COVID-19 Could Prove to Be a Major Turning Point for ESG Investing.” Investors from 50 global institutions were polled and over 70% saw some likelihood that an unforeseen event like a pandemic could increase the desire to tackle high-impact risks such as climate change and biodiversity losses. Over half felt the pandemic would add to momentum towards ESG in the next three years.
With this much interest and activity, it makes sense to take a closer look at sustainable investing. As part of its advisory activity, HCR Wealth Advisors is committed to staying on top of developments in this emerging area so it can better serve clients interested in having their portfolios more closely represent their values.
How do you combine profitability with ESG?
The majority of ESG investment is in equity, with new funds being launched and non-ESG funds being repurposed to include it. And green bonds are the fastest-growing segment of the fixed-income ESG market.
Although more opportunities exist in the ESG space today, HCR Wealth Advisors points out that a registered investment advisory firm should carefully vet these. The firm notes that many such investments may have a feel-good aspect and provide the investor with an emotional benefit. But, that is no guarantee that the investments are generating the type of monetary return the client expects.
Companies are known to use the ESG acronym to attract investment, without following through on their actions. HCR has noted that mutual funds and ETFs may claim to be engaged in socially responsible investing, but do not necessarily focus on companies that follow high ESG standards.
A registered investment advisory firm like HCR Wealth Advisors can help clients identify viable opportunities that combine the right behaviors with the right profitability. As Katzen reminds us, “It is important to focus on both SRI and strong returns.”
In the past, the concept of investing in “do-gooder” companies or funds meant that a person would likely have to give up returns. However, as the sector matures, research and performance history are indicating otherwise. Among other things, responsible companies enjoy lower risks of losses, lawsuits, and disgruntled employees. And, lower risks often produce higher returns.
As an individual investor, one could do a lot of their own research and due diligence. And they could limit it to investing through ESG-focused exchange-traded funds (ETFs) to avoid the performance risk of an individual company. But three possible pitfalls exist:
- Values-based investing offers no shortcuts and follows the same rules of sound investing that other investments do. In reviewing a fund, for example, due diligence still needs to examine a fund’s investing style, quality, returns, and expenses.
- If one has a comfort level in one area of expertise, one could risk becoming overly concentrated in a specific (sustainable) industry, to the detriment of a healthy level of diversification.
- Historically, people who invest in mutual funds and ETFs tend not to move their assets often. (The behavior is referred to as “sticky.”) The danger is that they will not remain vigilant to be sure the fund achieves the social benefits — as well as returns — they were promised.
Those concerns can be resolved by working on portfolio development and management with a company such as HCR Wealth Advisors. If someone were to select a company, mutual fund, ETF, or green bond, an advisor can help its client be sure that the company or underlying companies are suitable to them and are reasonably likely to perform as expected.
Here are three key takeaways for those looking to expand their portfolio in socially responsible businesses:
- Understand the nature of the company or companies in terms of ESG: precisely what they focus on, how well they implement it, and how the company handles its own social and governance issues.
- Be aware of the company’s (or companies’) expected performance and monitor what it delivers.
- Be prepared to switch ESG investments if the chosen mutual fund, ETF, or bond fails to meet financial goals.
The term “tipping point” has been used for a long time when referring to the ESG market. However, many investment industry experts believe the pandemic has caused a substantial shift in how companies are pricing in sustainability. It is undoubtedly a market worth investigating.
About HCR Wealth Advisors — HCR Wealth Advisors offers trust and service in various areas, including financial services, wealth management, consulting, business, and insurance services. In emerging markets such as ESG, it is dedicated to being able to help clients through education and investment strategy development to create a personalized package designed to grow — and preserve — generational wealth.
This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this site.