In the past year, we’ve seen an uptick and flurry in media coverage of ESG (Environmental, Social, and Governance) investing ranging from claims of “greenwashing” to outright attacks. We expect our clients and investors to have questions after these articles and reports. Below we address them as best we can.
At a high level, we see a few themes emerging from the recent media blitz:
- Investors are worried about potential “greenwashing”. Rightly so, they are curious about whether their investments are actually impacting the world in a positive way and minimizing negative harm.
- Critics are claiming that the financial aspects of these portfolios aren’t sound, and that ESG underperforms investments that don’t explicitly take environmental, social, and governance factors into account.
- Some articles appear to be extreme, politically-motivated critiques of ESG.
As financial advisors whose goal is to help our clients invest in a values-aligned way, we are diligent about our awareness of wider industry and media trends so we can best serve clients and answer your questions.
Here are a few things to ask yourself when reading and learning about ESG investing:
Who published this critique?
It’s important to consider an article’s source, especially when ESG investing is being politicized.
- Does the writer have a political or industry affiliation that benefits from the contents of the article?
- Is this person affiliated with a fund manager? Are they trying to sell something specific?
- Does this person have deep experience in the ESG investing arena, or investing at all? Are they qualified to opine on the financial or impact space?
Based on the answers to these questions, one can bear a critical eye when reading the vast majority of articles currently circulating. There are many valuable critiques out there that are helping the ESG space grow and evolve.
Greenwashing: Is my portfolio actually values-aligned?
Over the past few years, there has been an uptick in greenwashing in the financial services industry. With significant assets flowing into ESG investments, there are many investment managers who are seeing an opportunity, slapping an ESG label on the fund, and doing the bare minimum from an ESG best practices and implementation standpoint.
At Abacus, we’ve been leading the way in values-aligned/ESG investing for over 20 years – we are pioneers in the space, not jumping on the latest trend.
For example, in the early 90’s, we were among the first advisors to advocate for and use SRI (Socially Responsible Investing) mutual funds like Domini Social Equity Fund and Vanguard FTSE. In 2007, we found ourselves frustrated with the dearth of SRI funds that offered global diversification, passive management, low costs, and tax efficiency. We approached Dimensional Fund Advisors (DFA) and worked closely with them to develop their Sustainable fund suite that continues to grow today. Our clients provided the seed funding for both funds, which today have over $7 billion under management, have significantly lower CO2 emissions than their benchmarks, and have performed similarly from a financial standpoint since inception (April 2008).
Abacus continues to work closely with large institutional managers to seed new sustainability strategies and contribute to the conversation around ESG screening.
In 2020, Abacus co-authored and dedicated itself to the new Due Diligence 2.0 Commitment. This commitment encourages asset owners and advisors to use an alternative (but not concessionary) framework so that meaningful capital can shift into the control of BIPOC (Black, Indigenous, and People of Color) managers.
Due Diligence Criteria
With the help of our impact partners who have full-time analysts working on ESG due diligence, we employ rigorous criteria to evaluate which managers in the industry are truly aligned and walking the talk.
- What does their team look like?
- What is the impact approach they take?
- How do they measure success?
- How do they share with investors the goals and outcomes of their company engagement around environmental, social, and governance issues?
The Community Impact Bond Fund invests in well-researched, fossil fuel free bonds that have direct (and measurable) positive environmental and societal impacts, with most bonds qualifying under the Community Reinvestment Act (CRA) of 1977. The CRA is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.
Beyond the fund being well-diversified and managed by a highly experienced team with a strong track record, there are multiple reasons the investment was approved from an impact perspective:
- The firm is employee-owned (57%) and has a gender-diverse leadership team.
- Customized impact reporting tracks the positive-based community outcomes of the portfolio using quantitative metrics and qualitative monitoring.
- Management’s engagement with bond issuers to promote best practices around environmental, social and governance issues.
What’s the truth about ESG data?
It’s important to be honest about where we are in the ESG investing evolution. ESG investing is a movement that is constantly changing and moving forward. While the data is not always perfect, it has come a long way over the years, and part of being an effective ESG investor is pushing for more data disclosure and welcoming regulation over ESG managers and metrics.
In reality, ESG is just a framework for what to look for when analyzing a company based on factors that are outside of their financial statements. How data is collected, interpreted, and integrated into an investment process is up to the investor/manager.
The fact that it takes skill and experience to derive meaningful insights from ESG information does not mean that ESG is inherently flawed. It’s really about finding the right implementation partners who deeply understand the data and are dedicated to the movement.
What about the headlines that say ESG funds underperform?
While it may be true that many ESG funds underperform the market, the same can be said for non-ESG funds that try to outguess the market while charging high fees. This is not always the case for funds that Abacus clients are invested in. Over the past decade, Abacus clients have benefited from portfolios that track their non-ESG counterparts closely. That’s because we approach investing and portfolio construction in a rigorous way, while incorporating ESG considerations.
- Diversification and portfolio construction: Some criticism is around measurement of actively managed ESG fund performance. At Abacus, we continue to believe in a passive investment philosophy, while actively incorporating values and engagement strategies. All Abacus model portfolios are broadly diversified with hundreds to thousands of companies across countries and industries to target similar expected returns from the markets. Clients own the companies that are aligned with their values from each country and industry.
- Fees: Many criticisms point to higher fees. The majority of Abacus’ portfolios have total expense ratios within a few basis points of their non values-aligned counterparts.
- With our Social Justice portfolio, many are willing to pay the higher fees associated with supporting the unique, social movement-led advocacy, engagement, and campaign work characteristic of the companies in this portfolio. Higher fees are disclosed up front.
What about increased regulation on firms that offer ESG?
We welcome more regulation by the U.S. Securities and Exchange Commission (SEC) around ESG. This will hold managers to a higher standard (which Abacus already is doing) and require them to act with integrity, ultimately protecting individual investors from portfolios that don’t actually align with their values.
The SEC rules require fund managers to invest the majority of their assets in a way that aligns with the title of their fund (i.e. “ESG” or “Sustainable”) and bars funds from using “ESG” in the title if environmental, social, and governance factors are not a key piece to making investment decisions. They’re also requiring more disclosure around the way ESG is marketed to investors.
In the spirit of building the ecosystem, we welcome the chance to share our approach with regulators and others in the industry. We have substantial data spanning many years to demonstrate that clients can have a comparable investment experience while investing in line with their values.
What about my own values-aligned investments?
We believe in honest and transparent communication when it comes to your investments. We encourage you to speak with your Abacus advisor about any and all questions regarding your investments, financial plan, and goals.
As we work to expand what’s possible with money, we are grateful to our clients, colleagues, and fellow leaders in the impact space who are paving the way for a healthier and more sustainable world.
