Over the last several years, the total amount of assets invested in ESG (Environmental, Social, Governance) investment strategies has dramatically increased. These strategies, also sometimes known as sustainable or impact investing, seek to invest in some way that meets criteria and investor values in relationship to the environment, social issues such as diversity, and/or corporate governance.
According to the U.S. SIF Foundation, a sustainable investing trade group, $17.1 trillion was being managed following some form of socially responsible investment approach at the end of 2019. According to Morningstar, $21.5B of assets flowed into mutual funds and exchange-traded funds that follow ESG strategies in the first quarter of 2021.  Bloomberg recently published an article that estimated ESG assets may hit $53 trillion by 2025, roughly one-third of all global assets under management.
The attraction of investing in ESG is easy to understand. Investors, both individual and institutional, want to invest their money either in companies that reflect their values or specifically avoid investing in companies that operate in some area that the investor does not want to support. This can mean a positive screen such as investing in a company that is increasing the diversity of its Board of Directors or avoiding a company involved in an industry that is seen as harmful to the environment.
As investors have increased their allocations to ESG strategies, the investment industry has rushed to create products that attempt to appeal to this increased interest. However, as is the case with many investment products, investors need to perform due diligence to understand what they are buying. ESG can be a very subjective term and how a manager defines ESG can have a wide range of meanings. There is no standard for defining ESG from a securities regulator view.
The SEC has taken notice of this ESG trend and has taken steps to better define the ESG space. In February of 2021, the SEC issued an investor bulletin on ESG funds and in April issued a Risk Alert regarding SEC examinations for mutual fund companies that claim they are following ESG strategies.
One of the biggest challenges in choosing investments that claim to follow ESG ideals is simply defining what the term means. US regulators have not defined many of the terms used by ESG proponents, such as “sustainable investing”. There are some voluntary global frameworks for ESG investing, such as the Principles for Responsible Investing and Sustainable Development Goals that are sponsored by the United Nations. However, those guidelines are voluntary and not official SEC rules.
Some managers take the approach that they use ESG considerations in conjunction with other more traditional financial measurements. Other managers take the position that ESG factors are the most important consideration and will drive company performance in the future. Some managers utilize “negative screens”, meaning they will screen out companies that violate some core policy, such as a prohibition on alcohol, tobacco, or firearms. Others will use “positive screens”, meaning they will intentionally select to invest in firms that are actively promoting one of the fundamental ESG principles, such as developing clean energy or actively promoting diversity.
Many observers suspect there might be investment funds that are using ESG as a marketing ploy and not delivering on their claims of sustainable investing, commonly referred to as “greenwashing”. While many firms have been following ESG guidelines for years and do an excellent job, the SEC is signaling that they will be taking a closer look at managers who claim to be utilizing an ESG approach but are not actually delivering on that promise. Since ESG is relatively undefined in securities law, the SEC has indicated that they will examine claims that investment managers make in their marketing and advertising and compare those claims to how the manager is actually investing portfolio assets.
For many people, ESG investing is an extremely important topic. They feel strongly that their investments should reflect their personal or organizational values. However, not all investment managers who promote themselves as ESG managers are delivering on their claims. Investors should carefully research any ESG strategy they are considering and make sure the reality of the portfolio aligns with their marketing statements.
At Bordeaux Wealth Advisors, we are frequently asked by clients to help implement their portfolios in an ESG or impact-oriented investment manner. BWA and our research group not only undertake a level of research to determine their investment adequacy and return potential but also an additional screening on the fund or manager’s focus and effectiveness in aligning the organization or actual portfolio relative to their pre-determined ESG goals.
While each client’s ESG goals and issues are unique and diverse, Bordeaux has elected to not set forth any specific ESG criteria or objectives as a firm. Instead, our Investment Committee has adopted and approved the criteria and methodology in use by our two investment research firms, Mercer and Morningstar. If you would like more information about our ESG offerings or the criteria used by Mercer and Morningstar in evaluating these strategies, reach out to your advisor who will be happy to share this with you.
 Munk, Cheryl Winokur “The New Math of Socially Responsible Investing”, The Wall Street Journal, June 28, 2021.
 Environmental, Social and Governance (ESG) Funds – Investor Bulletin | Investor.gov
 SEC.gov | The Division of Examinations’ Review of ESG Investing
Author: Jon Snare CFA, CFP®