What is ESG or SRI and is it a good option for me?
You may have seen or heard about Socially Responsible Investing (SRI) or Environmental, Social, and Corporate Governance Investing (ESG) and wondered if it is something you should consider adding to your portfolio. I’ve had several clients ask about SRI and ESG investing over the past several weeks and so I thought it might be helpful to cover the basics.
When someone uses the acronym ESG or SRI – they are normally talking about a strategy that focuses on evaluating various sectors of a business and whether they are sustainable and responsible. You may also hear the term “values-based investing” or “impact investing” which have a lot of overlap and similar goals for choosing an investment strategy. While all these names and acronyms could have a lot of different meanings for different people several resources are doing the research and analysis to standardize this evolving investment strategy such as the Forum for Sustainable and Responsible Investment.
There are a wide variety of factors to consider when adding ESG/SRI funds to your portfolio. Within the 17 different categories, investors can choose to focus on a particular aspect that aligns with their values. For example – someone may value initiatives to address climate change in which case they may choose a fund that emphasizes companies that promote alternative forms of energy and/or exclude companies that sell fossil fuels. Whereas on the other hand, you might value avoiding specific types of companies that sell tobacco or manufacture weapons.
One aspect to thoroughly evaluate is the underlying fees that can often be higher than non-ESG funds. The reason for this is that they must pay people to analyze and evaluate what should be included or excluded. One issue I have recently run into with several clients is the fact that some ESG funds can be 5x as expensive as their non-ESG counterparts however many of the top 10-20 holdings are the same. Do your homework (or ask for help) to see if you are paying a premium to own many of the same companies. It is important to do your research or reach out to us at MainStreet Financial Planning if you have questions. I’ve also included a few helpful resources below if you are interested in learning more about ESG/SRI investing.
This website is a great resource to check out the 17 different sectors that make up ESG investing.
The Forum for Sustainable and Responsible Investing has an education center where you can take a free online course on sustainable investing.
Morningstar created its own Sustainability Rating system that can help more easily compare the sustainability of similar funds.
Certified B Corporations are awarded to companies that meet stringent standards that align with ESG values. Their goal is to “measure a company’s entire social and environmental impact”