Why Investors Need ESG In Their Portfolio

Last Updated on January 15, 2019 by Zion Miller

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Overview

MS has extensively covered small cap speculative plays and intends to increase coverage on longer term “safe” plays. To kick this off, we will take a look at ESG and why so much noise has been made around the acronym.

What Is ESG?

The concept of ESG was coined in 2005 when a study titled “who cares wins.” Since this article, ESG has been a hot topic recently as investors become increasingly concerned with potential scandals and pursing investments which are perceived to have beneficial impact when compared with typical corporations in the industry. A further look into ESG provides validation in this investment thesis, as the funds who pursue such criteria have traditionally outperformed the general markets and in a worst-case scenario match the returns of the highest revered indexes. Firms who target ESG who are within compliance of this criteria are clearly successful. This can be seen with statistics such as ESG currently having a rough valuation of $20trillion which loosely translates to a “quarter of all professionally managed assets,” as forbes writes in their article The Remarkable Rise Of ESG.

Why ESG?

A multitude of problems face businesses and our world. ESG is in essence growing to provide solutions to these various hurdles our world is faced with. By screening for compliant companies, ESG funds are shifting business practice to more sustainable practices and are often leading to higher returns than the market indexes viewed as the standard. In addition to the good “pr” brought about by investing sustainable practices, ESG shifts practice as it has been tracking results which are too disruptive to ignore. With such numbers, exchanges are rapidly moving towards adapting such practices with things such as the IFRS. For those of you unfamiliar, this project has set out to provide financial exchanges with a “standard for transparency, accountability and efficiency.” In essence this can be summed up as a GAAP approach to CSR reports. A standard to hold corporations to when it comes to their progressive CSR practices. This is a dire need as many companies leverage CSR reports in their annual reports, but do so as a marketing stunt in many investors eyes. There is little to no standard to hold these numbers to. ESG presents a challenge to our outdated practices, as it is pushing exchanges to recognize areas of business that have previously been overlooked.

Where Do I Start?

Although ESG has seen lot of growth, it can be difficult to find a starting point. Luckily MS has your back. Polen Growth is a decent place to start ones search. With assets coming in at $2.6 billion, the fund is minuscule but has realized a return in excess of 20%, validating the above data on ESG. An overview of their fundamentals and other data can be found by clicking the following. A further dive into top performing ESG funds reveals tickers such as VITAX. With assets coming in just shy of $25 billion, the fund has tracked nearly 24% through ESG compliant practices incorporated into their strategy. In contrast with these two tickers, the more aggressive investors may be inclined to pay attention to funds such as Leland Thompson Reuters Venture Capital (LDVIX). This fund has assets of $99.5 million but realized gains of 37.23%! Clearly ESG funds are successful and competitive when compared to general indexes.

 

Disclosure

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