ESG is part of the Socially Responsible Investing (SRI) and sustainability movement that focuses on integrating Environmental, Social, and Governance criteria into investment portfolios, with a view toward fostering a more sustainable and well-governed financial system and producing more responsible corporations. While ESG integration is still in its early stages, ESG investing has become increasingly popular with individual and institutional investors, aided by the development of more quantitative, data-driven, and systematic approaches now available from index providers.
A broad array of core themes and issues underlie each of the Environmental, Social and Governance pillars, including carbon emissions and footprint, climate change vulnerability, water stress, raw material sourcing, pollution and waste, labor management, product safety and quality, privacy and data security, access to healthcare, access to finance, Board composition and other corporate governance matters, tax transparency, and corporate behavior.
The main advantages of passive investing (consistency, transparency, and cost-efficiency) are equally relevant to passive investing through an ESG lens. ESG criteria can be integrated into index methodologies by i) using ESG ratings to form a best-in-class selection of index constituents or ii) applying tilts toward constituents with stronger ESG ratings and tilts away from those with weaker ESG ratings, along with other constraints.
These passive approaches to ESG integration aim to achieve neutral to superior risk-adjusted returns than their market-cap base benchmark over the long run without significant tracking error. Continued growth in the number of ESG ETFs is enabling individuals and small institutions to pursue low-cost ESG strategies similar to those utilized by large institutional investors.
Given the growth of ESG-conscious investing, companies are increasingly incentivized to improve their ESG scores, which supports the objective to promote change in corporate behavior and broaden the focus beyond narrow profit maximization. Importantly, while the performance track record is limited, early ESG Index returns are quite promising compared to traditional benchmarks, helping to alleviate common investor concerns about sacrificing returns. Evidence suggests that many companies that are socially responsible are more likely to lead in overall management capabilities. Studies have also shown that incorporating ESG criteria into investment methodology can improve risk-adjusted returns without disrupting primary investment objectives. Lastly, ESG-conscious investing can help individuals and fiduciaries minimize reputational and operational risk associated with their investment portfolios.
Blue Edge Capital has developed ESG portfolios for individual and institutional investors who wish to access the associated social and financial benefits of sustainable investing through transparent, liquid, and cost-efficient ETFs. Our ESG portfolios are designed around our core investment philosophies and employ a similar approach to asset allocation and ETF selection as our Global and Traditional portfolios. We worked closely with thought leaders in the ESG space to develop products that will resonate with individual and institutional investors who increasingly seek to align their capital with their mission or values.