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As ESG Integration Grows, Investors Should Avoid Common Misconceptions

Dave Zellner portrait photo

   By Dave Zellner
   Chief Investment Officer
   August 18, 2020

Recent global events, including the COVID-19 pandemic and worldwide protests of racial injustice, have led to heightened conversations about aligning investment portfolios with the interest and values of their underlying investors.

As a longtime proponent of integrating the consideration of environmental, social and governance (ESG) factors into the investment decision-making process, I am glad to see these conversations happening on a larger scale. But with interest in this subject growing, I think it’s important to remind investors of the common misconceptions we see in the ESG space.

The single biggest misconception involves the relationship between ESG integration and investment performance. Too often, especially in the U.S. investment community, ESG investing is conflated with sacrificing returns in order to align one’s investments with their personal beliefs.

On the contrary, we believe ESG integration is an important tool in analyzing any investable company. The practice is therefore a necessary tool for prudent fiduciaries and should be integrated by investment managers just as they would consider valuation metrics, company management, regulatory issues, industry competition and myriad other factors.

Excluding companies based on individual beliefs is what we would call “values-based” investing. Wespath has applied values-based exclusions for decades and will continue to do so in the future. However, we encourage investors to think of ESG integration as a “value-adding” practice that aims to deliver stronger long-term investment results.

ESG integration involves considering additional risks and opportunities that could affect the long-term sustainability of the business. These include workplace safety, the location of facilities in areas subject to the physical risks of climate change, the potential consequences of a tax on carbon, diversity of workforce and board—the list goes on.

The most successful investment analysts and portfolio managers are the ones that can process all available information about a company before arriving at a buy, sell or hold decision. Doing so ensures that decision makers have a complete picture of all the risks and opportunities a company presents.

At Wespath, we have developed a framework to approach this decision-making process. It helps us consider ESG factors through the lens of a sustainable global economy—one that promotes economic prosperity for all, social cohesion and environmental health. We believe the transformation to a sustainable global economy will help ensure the development of healthy financial markets and resilient companies, ultimately improving market outcomes.

Other asset managers and investors will likely develop their own visions of long-term sustainability, but the commonality should remain simple: analyzing ESG factors is an important step in any investment process and can help improve investment performance in the long run.

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