Environmental, social, and governance information encompasses an incredibly wide spectrum of topics, and because of that, it is so often misinterpreted. ESG integration is the practice of incorporating material environmental, social, and governance information into investment decisions to help enhance risk-adjusted returns. Put simply, it’s the consideration of information related to companies, people, the environment, the economy, and how those things intersect.
Investors recognize that macroeconomic trends and systemic risks can have a financially material impact on companies, for example automation, urbanization and population growth, climate change, consumer needs, and human capital management. ESG information helps investors better understand these issues and how they will affect companies and their ability to stay competitive.
Decoding ESG signals
To more tangibly demonstrate what the acronym ESG really means, in February, we launched a monthly blog series focusing on a different sector and an industry within that sector, identifying an ESG issue relevant to that industry, and discussing it through an investment lens across the areas of risk, opportunity, and impact.
February: The Price of Water
- Sector: Information Technology
- Industry: Technology Hardware & Semiconductors
- ESG Issue: Water use in the supply chain
March: An Industry, Derailed
- Sector: Industrials
- Industry: Rail Transport
- ESG Issue: Service Governance, quality, and safety
April: Anaphylaxis, Kim Kardashian, and Muni Bonds
- Sector: Healthcare
- Industry: Pharmaceuticals
- ESG Issue: Access and affordability
May: Cyber Hacks, AI, and the Digital Divide
- Sector: Communication Services
- Industry: Telecommunications (integrated and wireless)
- ESG Issue: Privacy, security, and access
June: Advice to REITs — Think Local
- Sector: Real Estate
- Industry: Real Estate Investment Trusts (REITs)
- ESG Issue: Community engagement
July: Former flames, missed connections, and turning up the heat
- Sector: Utilities
- Industry: Electric Utilities
- ESG Issue: Climate risk management
August: Participation, not exploitation
- Sector: Materials
- Industry: Metals & Mining
- ESG Issue: License to operate
September: Cows, grains, & greenhouse gasses
- Sector: Consumer Staples
- Industry: Food Products
- ESG Issue: Climate change
October: 3 ways to address the energy sector with your investments
- Sector: Energy
- Industry: Oil & Gas
- ESG Issue: Energy transition
November: Fashion’s faux pas
- Sector: Consumer Discretionary
- Industry: Textiles, Apparel, and Luxury Goods
- ESG Issue: Pollution, waste management, and biodiversity loss
Moving beyond acronyms
ESG is just a clunky abbreviation to describe a bunch of topics that didn't used to be considered in the investment process. When it comes down to it, it’s the utility of the information that matters, not what you name it.
Even amongst investors who agree on financial materiality as an objective with ESG integration, there’s plenty of different perspectives on what ESG information is actually material and how to apply the insights from that information to decision making. Time horizon is important to consider, as many of these macroeconomic and systemic issues are dynamic, and the market response and pricing of these considerations is also rapidly evolving.
Not only that, but companies cannot be bucketed into “good” or “bad” buckets. They are living organisms with good and bad attributes. They emit carbon, and they also manufacture products that save lives. They deliver innovations that advance society, and they also may treat their employees poorly. As a result, different investment managers emphasize different ESG information in decision-making.
The use of ESG information is not a case for morality or a righteous crusade for altruism. Sustainable investing simply provides a path forward for investors to more thoughtfully allocate capital to companies that are managing material risks and may be better positioned to stay competitive over the long term.
Learn more
To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable/.
