Evaluating Investments with an ESG/SRI Lens

At Envest Asset Management, we have a menu of investments that we choose from to personalize investment strategies for clients. Though many clients will be invested in the same funds as others, overall allocations vary based on risk appetite, client ages and intended use of the investment portfolio. 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 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.”[2]

[1] G&A Institute


[2] McKinsey: Does ESG really matter and why


ESG Investing at Envest Asset Management

At Envest, a guiding principle of our firm is to provide clients with balanced, quality investment portfolios that also address environmental, social and governance (ESG) sustainability.  We also help clients express individual values on a limited basis when that is requested.  That said, this type of investing is a choice, and we do manage portfolios for clients that may have a relatively mild interest in such investing. In short, we do not overlay our firm bias on client portfolio management as we know this investment lens isn’t for everyone.


For those clients who come to us with an interest in sustainable and/or values-based investing, we wanted to give an overview this month of the big picture landscape for this type of strategy.  We closely follow the debate on the topic and wanted to share our view.


Borne out by data, ESG investing is definitely not a fad. Since 2019, according to Morningstar, there have been $144 billion of net inflows into sustainable funds. Some of the biggest names in the industry provide sustainable funds, like BlackRock, Vanguard, Nuveen, and State Street, to name a few. While political regime changes may promote or criticize sustainable/ESG practices, numerous publicly traded companies have some sort of sustainability policies in their corporate framework. According to a study by Harvard Business School, nearly 90% of the S&P 500 do so.


We know there can be some pitfalls in trying to create an ESG portfolio.  For example, an overweighting in technology and an underweighting in energy.  As advisers focused on this space, we view our role as creating a balanced portfolio for our clients that both has a lens of ESG factors and also gives exposure to diversified companies across industries in both the US and overseas.


We view ESG investing as a risk management framework – not “woke” capitalism.  We don’t make claims about whether ESG investing will produce superior or inferior returns because studies have been done that conclude both and timeframes make all the difference.  Instead, we tell our clients that investing with this lens means investing in companies that proactively address ESG issues through their operations and hiring decisions.


Our clients value this type of investing not simply for the values expression but also because as the importance of these issues become more and more apparent, they choose to invest in entities that are looking ahead and planning for resiliency in a changing world.


Next month we will take a more detailed look at how we choose investments (not individual companies, but exchange-traded and some mutual funds).  The landscape is dynamic and sometimes open to interpretation – we put a focus on key factors that provide consistency across our investing landscape.esg