Social and ESG: What’s the deal?
Social and ESG are two acronyms often used in the investing world, especially when looking at impact investing (sometimes called Socially Responsible Investing). There’s no denying that both have made an enormous difference in the world we live in, but there’s also debate over what they mean to the average investor—or if they even matter at all. To help cut through some of the confusion, here’s a breakdown of what Social and ESG mean in this context and how they can make all the difference to your portfolio.
The United Nations have adopted social and environmental goals to achieve globally by 2030.
Part of their sustainable development goals (SDGs) is 17 goals adopted by 189 countries to achieve globally by 2030. They include ensuring quality education, affordable healthcare, economic growth, gender equality, and climate action. And each one is linked to one or more of what is called sustainable development pillars – like climate action or health – that together make up a foundation for sustainable development.
How will it affect you as an investor?
As investors, we are primarily concerned with two fundamental things regarding our portfolios— whether or not we make money (i.e., portfolio return) and whether or not we incur a loss (i.e., portfolio risk). The problem with relying on portfolio risk as your primary performance indicator is that it only tells you how much you will gain or lose on your investment. It says nothing about your actual returns. However, by also including social considerations in your investment research process, you can improve both of these numbers (portfolio return and portfolio risk) at once. This gives you a more complete picture of potential investments than relying solely on traditional metrics such as total return, alpha, beta, and Sharpe ratio. So what do we mean by social considerations?
Do you support the SDGs?
UN member states adopted the SDGs in 2015, which was quite a feat as they are an ambitious set of goals with targets spanning 2030. Goal 16 is dedicated to promoting peaceful and inclusive societies for sustainable development while also calling on national governments to promote social justice and reduce inequality within their borders.
How does it help with your portfolio management/target audience?
Investors have noted recent research on sustainability—also known as social and environmental governance, or ESG, issues—and found it helpful. It can help investors in a few different ways.
First, incorporating ESGs into investment analysis allows asset owners to align their investments with their values better.
Second, socially responsible investors can use investments with a positive social impact to raise capital for social ventures. In fact, according to some experts, social entrepreneurship could be one of the most effective ways to reduce inequality and increase prosperity around the world.
Third, investing in sustainability-focused companies is often associated with superior performance for both companies and shareholders. For example, since its inception 21 years ago, Calvert Impact Investing Index Fund has outperformed S&P 500 by nearly 2% per year.
This represents just one approach; other sustainable investing strategies also exist. The key, though, is to find something you’re comfortable with (that fits your time horizon, risk tolerance, and financial goals) and then stay focused on it.
Social ESG made easy.
At Findings, we urge our clients to track and report their ESG performance via our Findings ESG solution; Reporting your social efforts shouldn’t be different.
Remember that integrating an easy-to-use, cost-efficient solution can ease your way into ESG compliance while using industry best practices to elevate your current efforts.
[Discover how you can use Findings ESG for your needs]