Socially responsible investing is entering a new era. For decades, socially responsible investing meant excluding the so-called “sin stocks” - those involved in the production and sale of tobacco, alcohol, salacious materials, etc. Choosing which companies to exclude was a difficult process. Does Wal-Mart get excluded because a portion of their sales come from beer or cigarettes? How about a hotel chain who profits on adult-themed pay per view in-room movies? Largely because of these and other issues, traditional socially responsible investment vehicles never really took off.
Recently, a new generation of socially responsible investing, known as ESG, has become a hot topic in the financial world. ESG stands for Environmental, Social and Governance and attempts to score how companies treat people and the earth. This has become a big focus, especially with younger investors.
Like the traditional method, there are some inconsistencies. Many of the ESG components are not required in quarterly SEC filings. Instead, companies can choose whether or not to disclose some or all of the relevant information. Of course, this leads to the best performers shouting how well their doing from the rooftops while the worst stay silent. Also, many ESG areas are qualitative, not quantitative, making it difficult to compare companies.
There are groups trying to make sense of this category. The Sustainability Accounting Standards Board (SASB) is working hard to have companies apply their reporting standards. Companies such as S&P and Moody’s assign companies a rating, much like they do with fixed income investments. Yahoo! Finance, Bloomberg and others now include an ESG score for companies based on the available data.
I have done ESG portfolio reviews for a few clients in the last several months. If you are interested in a similar review or just have questions on this newer area of investing, please give me a call and I’ll be happy to share what I know.