Since its 1970 inception, annual April 22nd Earth Day celebrations have given “voice to an emerging public consciousness about the state of our planet.” Once viewed as a fringe college movement, this global organization is now recognized as a leading voice in ecological activism. Environmental stewardship has also seen exponential growth in the past few years, and the financial industry is no exception.
There’s no shortage of jargon in the financial industry, but this one has garnered a lot of attention: ESG, investing in companies that are Environmentally friendly, Socially responsible and with Governance accountability.
Part 1 of “ESG, Sustainability & Profit” offers more detail:
- What ESG Investing Is—and Is Not
- Brief History
- By the Numbers
Continuing the conversation, we now explore investment performance and preview some of Mayflower Advisors’ impact investing solutions…
Investment Performance
In a recent Morningstar podcast “ESG Is a Paradigm Shift”, Jon Hale (Morningstar Global ESG Research Leader) discussed the long-standing concern that, perhaps, there is a trade-off on performance when it comes to ESG: “My view on that,” he says, “is that, first of all, you should not expect there to be a trade-off on performance. And that judging, generally speaking, from fund performance—ESG fund performance—there’s no underperformance. When I say that, I mean, in general, there’s no underperformance.” Hale goes on to note that, in 2019, out of 300 ESG funds, 65% of the funds finished in the top half of their Morningstar Category.
Contrary to widely held misconceptions, well managed sustainable investing has the potential to be not merely a tool for social change but also a portfolio booster.
In “A Broken Record: Flows for U.S. Sustainable Funds Again Reach New Heights,” Hale further explains: “Sustainable funds performed well last year relative to conventional funds during the uncertain economic and market conditions caused by the pandemic, underscoring the value of considering ESG risks in portfolios.”
According to the PwC Report, “Asset & Wealth Management Revolution: Embracing Exponential Change,” companies focusing on the ESG indicators most financially relevant to their industry tend to perform well.
Sustainable Funds Annual Flows & Assets; Source: Morningstar
They may have attractive investment characteristics. In “Doing Well While Doing Good”—An Introduction to ESG and Impact Investing, Nic Millikan notes examples like “a decreased cost of capital, lower volatility and fewer instances of fraud and malfeasance,” which is broadly attributed to the “increased transparency, accountability, and results-orientated reporting that such firms hold themselves to which help drive these positive relative returns.”
Profits AND Purpose
“Sustainable investing has been around for decades and is not going anywhere,” contend the authors of the report, “Dispelling the Five Common Myths: A Guide to Sustainable Investing.” While the concept of espousing social values through economic influence is nothing new, this approach has been refined and customized to offer a new take on the historically grounded concept.
The biggest myth on ESG investing is that it requires giving up on performance. This is not true: Performance data indicates that shareholders no longer have to sacrifice profit for purpose.
Finally, we can have both: “This virtuous combination of burgeoning demand and investment rationale will drive the ESG asset pool’s rapid growth … ESG outcomes are likely to become an integral part of investment solutions, and ESG analysis an essential investment tool,” according to the PwC report.
Mayflower’s ESG Investment Solutions
In addition to traditional portfolio offerings and investment vehicles, Mayflower utilizes solutions that align with our clients’ values via two-fold strategy choices:
1. Dedicated ESG portfolios
*or*
2. Customization of an equity index to target your specific social or environmental outcome—alongside returns
To illustrate the point, Mayflower’s Director of Portfolio Management, Jonida (“Jona”) Papajani, CFA®, CAIA®, references the urgent need to stabilize concentrations of CO2 and other greenhouse gases. In the long-term quest to achieve net-zero emissions, ‘Pledges’ of CO2 reduction—supported in various ESG-focused portfolios—represent an improvement: “In this regard, the world is making some progress. But the key question is can we act quickly enough?”
In recognition of Earth Day, we compiled some encouraging data to demonstrate the quantifiable impact and performance of Mayflower’s sustainable investing portfolio .strategy
Impact: Compared to an all-equity, indices only portfolio, investing $100,000 in Mayflower’s all-equity ESG portfolio would result in the following annual average: 2,895 LESS gallons of carbon emission *or* 2,098 LESS average daily commutes.
Performance: As of December 31, 2020, Mayflower’s all-equity, ESG portfolio would have delivered a 1% HIGHER annualized return than its equivalent indices only portfolio for the past five years*.
Papajani celebrates that today’s investors can “be a tool of change through ESG investing”—emphasizing performance monitoring and the portfolio-building pillars of ESG-related data integrity and impact measurement.
Please contact your personal wealth manager about your own unique situation and to learn more about Mayflower’s diverse ESG investment opportunities.
*Past performance does not guarantee future results.
This content is gathered from sources believed to be credible and informational in nature and not intended as individualized financial, legal or tax advice. Wealth management and financial planning decisions are complex and fluid and should be structured around each client’s unique situation and needs. Parties should carefully consider all related benefits, risks and costs and speak to their trusted advisors before making any significant decisions.
As with any other form of investing, investors must establish their goals and weigh the potential benefits of the various approaches against any relevant risks and costs to give themselves the best chance of achieving their desired outcomes. The SEC recently put out an Investor Bulletin to provide investors with specific information related to ESG Funds, including important questions to ask if considering investing in them. The SEC reminds all investors that is important to understand what you are investing in, and to be sure a fund (or any other investment) will help you achieve your investment goals. Investors should also consider whether a fund’s stated approach to ESG matches individual goals, objectives, risk tolerance and preferences.