Does ESG Belong in Your Portfolio?

Our second video in our Proteus Viewpoint video series, Does ESG Belong in Your Portfolio?

For further information on ESG, read the below Q&A.

Q: What does ESG mean?

A: ESG is an acronym for ‘environmental, social and governance’. It is an investment philosophy that takes into consideration ESG factors when deciding what stocks or bonds to hold in a portfolio. Another common term associated with ESG is sustainable and responsible investing (SRI), and ethical investing.

Q: What do SRI strategies hope to accomplish?

A: At its core, SRI strategies look to eliminate stocks from the portfolio that don’t meet the identified SRI criteria. Common ones include production of military weapons and alcohol. Some organizations have philosophical beliefs that are aligned with SRI principles and they find it appropriate to focus their investing in companies that share similar beliefs.

Q: Are returns better with ESG investments?

A: That is the million-dollar question! At the end of the day, the easiest thing to look at to figure out if you are doing well are the performance number(s).

Q: Does ESG or SRI make your returns better?

A: Interestingly, the question becomes not so much whether ESG or SRI will make your returns better, but more so whether determining if it is an appropriate investment approach for your organization and beneficiaries.

Q: Why doesn’t everyone use SRI?

A: One challenge is that everyone’s definition of SRI will be different. What is unethical or immoral to one person may not be to another. Different pension plans also have different fiduciary expectations. Plan fiduciaries have to ask themselves if it is appropriate for the money they oversee on behalf of the plan beneficiaries to be restricted by their ESG biases.

Q; How do organizations determine if it would be appropriate to use ESG/SRI?

A: It is often a full discussion with the boards or committees.

- For defined benefit (DB) plans, depending on the type of organization, the boards often circle back on concluding that part of their job is to focus on the investments to provide the best possible return.

- For foundations and endowments, it is often a completely different conversation.

Q: How do you define ‘ethical’?

A: For DB plans, where the fiduciaries are making decisions on behalf of the various stakeholders, it is sometimes more difficult to agree that the board’s perception of ‘ethical’ generally represents the feelings of the beneficiaries. For defined contribution (DC) plans, where the beneficiaries make their own investment decisions, many organizations will offer both SRI options and regular options to allow the member to make the SRI decision – that way the member can decide how socially responsible they want to be with their money.

Q: Who makes the end decision?

A: In the end, fiduciaries have to determine where their responsibilities lie and whether SRI is an appropriate approach for their retirement plan.

ESG is a viable and growing component of the investment landscape and while it isn’t right for every pension plan, it is right for some.