ESG investing explained: Your questions answered
Environmental, social and governance (ESG) investing can have some gray areas—especially because it’s specific to the individual investor. This overview of the fundamentals may help you understand how you can use them in your investment approach.
In our recent webinar, we invited you to listen in to ESG investing explained—from its three focus areas and key terms to its growing interest with investors. Watch to learn more about:
- What E, S and G stand for in ESG investing
- The evolution of terms used to describe investing tied to values and how they differ
- Information about the Principles for Responsible Investment (PRI) and sustainable development goals (SDGs)
- ESG myths debunked
- Growth in sustainable investment funds
- UMB’s approach to ESG investing
Webinar: ESG investing explained
Your ESG investing questions answered
During the webinar, we also polled the audience and learned that more than 40% had no prior familiarity with ESG investing. Due to that, we thought it could be helpful to include some of the questions and answers we covered in the webinar (you can listen until the end as well).
Q: Could you give an example of the concept of inclusions and exclusions screening?
A: If we are looking at the “E” for environmental, there are data point screenings, for example, on the recycling programs in place at a business. Those stocks would get a higher ESG rating based on what they are doing with those recycling programs. If we look at the “G” for governance, we have software where we can screen for the percentage of females or diversity on a board of directors, and stocks with a higher ESG rating would be those with more women and diversity are their boards.
Q: What defines affordable housing when it comes to ESG?
A: Our bond managers look for inner city housing and try to find those individuals within the lower income brackets to help them access housing for costs they can attain. There are ESG specialists who can dig into this issue. Something our team does on a regular basis is to make sure managers who say they are ESG managers for affordable housing actually are, and we review what they are doing to help in each of the different categories.
Q: Is there a correlation between ESG and the executive branch’s viewpoint on issues such as global warming and fossil fuel?
A: Instead, you would want to look at how a sector is doing over time. Energy for example, has not been doing well when you look over 5-6 years, and ESG mostly avoids the energy sector.
Q: Are there any ESG oriented companies where COVID-19 is helping extend their non-carbon footprint? (ex: working from home)?
A: There is interest in the case that many companies have seen where they can move away from a centralized workforce. However, in speaking to real estate investors, contracts that people work under are relatively long in terms of leasing a commercial real estate space, so we think that trend is in place. However, it may take some time to work itself out.
Q: What are characteristics of a fund/fund company that an individual investor can look at?
A: Speaking broadly, most of the firms we do business with and find attractive have been in ESG investing space for more than 20 years. Those firms are founded around ESG principles and ran with it. What we like to see is a separate team that digs into the due diligence from an ESG lens and would have veto power over the fundamental side. Additionally, all of the firms we work with can speak to the portfolio director who is making the decisions, and they have access to management teams so that they can also access information on what they are doing to combat ESG issues. If they only do ESG work, at a firm level, they are focused on the importance and a risk mitigator as a portfolio manager.
If you are looking for additional research and studies, our investment advisors are happy to sit down with you and provide long-term ESG research, studies and examples in the fields you are interested in. For even more content about ESG investing, view our ESG library.
Jennifer Boxberger and Spencer Berndt