Most of our clients choose to have us invest with an overall lens of ESG and SRI (socially responsible investing) which we discussed in last month’s blog (AVAILABLE HERE). For clients where this is not an important feature, we have additional funds that we incorporate.

We select funds and ETFs with typically above-average sustainability “scores”.

We are mindful that ESG reporting by companies is still largely voluntary and not yet fully standardized; measuring this kind of risk exposure is still a relatively new phenomenon to many companies. Using data compiled by recognized leaders in the analysis of this information such as Morningstar and MSCI, we select funds and ETFs with typically above-average sustainability “scores”. This means the underlying companies prioritize minimizing environmental, social and governance risk in the operations of their core business. We also prioritize funds with an underlying SRI lens – selecting companies that advocate for or provide products and services that contribute to worthwhile social causes.

Think of a bank, for example, and how the Board of 30 years ago probably never considered how lending policies or bank operations might create exposure to environmental risks. Today, that kind of calculus, though onerous to do, is part of a majority of Fortune 500 companies’ shareholder reporting. In fact, 92% of S&P 500® companies published Sustainability Reports in 2020.[1] And carrying the thought through to its logical conclusion (from an ESG investor’s standpoint), wouldn’t you rather be invested in an organization that is assessing, and endeavoring to minimize, its risk to external factors?

For a fund to earn a high rating and for us to select a fund, it obviously has to do more than promise a focus on these risk factors. Our fund selection comprises a cross section of average to superior ESG ratings along with average to superior performance. (Choosing a fund that is average in both is not typical). We look for a positive intersection of both; prioritize low fees; and then look for funds that have lower volatility with similar returns as some with higher volatility.

As fiduciaries, our first duty is to protect our investors’ wealth – choosing investments that suit their risk appetite and that create a balanced portfolio. That means we select funds that focus on exposure to large, small and mid-cap companies; foreign companies, companies in the value category as well as growth. We also pay attention to industry exposure…prioritizing certain industries over others based on where we are in the economic cycle.

Some clients express specific areas of interest that they want to support through investing (this can be done through sector funds). While we do that with only a small fraction of a client’s overall investment portfolio (say 5-8%) we are happy to include, for example, funds that have a focus on improving access to clean water or that are supportive of sustainable agriculture. For clients with a critical focus on SRI, sector funds may play a slightly larger role.

Our fund and ETF selection prioritizes investments where both return and attention to additional risks outside companies’ core focus are critical. As McKinsey succinctly stated, “True ESG is consistent with a company’s well-considered strategy and advances its business model.

[1] G&A Institute

[2] McKinsey: Does ESG really matter and why