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You may not know this, but you can be an ESG investor even if the only form of investing that you’re active in is retirement savings. If you have a 401k or a 403b, you can roll over your funds into ESG portfolios, which is a great way to demonstrate your values through your investments.
ESG investing is tethered to the philosophy of ‘sustainable investing.’ It involves researching and factoring in environmental, social, and governance issues, in addition to the usual financials, when evaluating potential stocks. By investing your funds into ESG portfolios, you increase corporate accountability. How? As a socially-conscious individual, you can leverage your shareholder position to have a voice and influence corporations to act in the best interest of the environment, society and governance through proxy voting.
Aside from the ability to create change, you’ll also enjoy strong returns. A study from the Financial Times found that approximately six out of ten sustainable funds delivered higher returns than their conventional equivalents over the past decade. Furthermore, according to Morningstar, ESG-focused “sustainable funds" saw net inflows of more than $10 billion in capital during the second quarter of 2020. This brings the year-to-date inflow into ESG investing funds to $20.9 billion. The full-year record in 2019 was $21.4 billion so ESG-focused funds are projected to beat the record by year-end, which shows the future promise of socially conscious investing.
Given the rise of ESG investing, it is smart to incorporate sustainable funds in your 401(k) plans. In fact, many companies recognize that including sustainable portfolio options may be attractive to employees. If your company plan doesn’t include ESG options, you can look up the ESG ratings for the funds they do offer (Some funds have high ESG ratings even if they aren’t advertised as such). Morningstar has a widely trusted sustainability rating system that you can access with a free trial. If you have a 401k or 403b Rollover due to a change in employment and are looking to invest it for impact, please reach out, we'd love to assist you.
We all have a responsibility to care for the planet, the communities we live and work in. It’s incumbent on all of us to be responsible citizens of our society and reflect that shared sense of responsibility through our investment choices. ESG investing is lucrative - not only creating growth, but also fueling good - creating a more sustainable, conscious world.
ESG investing is tethered to the philosophy of ‘sustainable investing.’ It involves researching and factoring in environmental, social, and governance issues, in addition to the usual financials, when evaluating potential stocks. Until recently, ESG reporting has been more of a niche. Companies are making voluntary disclosures in their annual report or in a standalone sustainability report. In support of this, activist investment firms like Aneuvia, work with clients to reassess their ESG footprint and operations to increase value among investors.
Since ESG metrics are not part of mandatory financial reporting, corporate ESG data has historically been lacking in quality, consistency, and comparability, which makes it difficult for asset managers to determine where to direct investments.
Now, regulators are jumping in to address the lack of common reporting standards in ESG reporting. Our latest whitepaper The US’s ESG Regulatory Environment: Past, Present, and Future shares a few trends that are likely to shape the future of ESG reporting:
Universal and sector disclosures
Forthcoming European proposals are focused on “universal disclosures” which means regulators will pick a subset of the myriad of ESG topics and require all companies to report on them. When it comes to what exactly will comprise the list of universal disclosures, more alignment is needed particularly when it comes to climate change). Climate change has been prioritized so it is safe to forecast that reporting on corporate carbon footprint will become mandatory. In addition to this, the Sustainability Accounting Standards Board (SASB) has also looked into sector standards, which establishes sector-based disclosures.
Materiality refers to how companies select the topics that they will report on. This flexibility and the onus placed on a company-by-company basis has also been problematic. Forthcoming European proposals suggest that regulators and standards setters will decide materiality. This will help achieve data comparability.
The SEC’s Asset Management Advisory Committee has advocated for mandatory standards that can provide guidance for the current principles-based materiality requirements. The committee urged for a parsimonious, rather than a comprehensive approach, advising to develop a limited set of industry-level materiality metrics, to be monitored by an independent standard-setter such as SASB.
Establishing global consistency
A complaint about the ESG reporting world is the lack of consistency. There are several organizations providing overlapping reporting standards, which adds confusion and results in inconsistent disclosures.
Amidst concerns of fragmentation, reprieve came last September when the International Financial Reporting Standards (IFRS) Foundation announced its plans of creating global sustainability standards by drawing inputs from key ESG reporting frameworks and standards. While the methodologies, definitions, purposes and audiences might vary, these ESG reporting bodies are lending their support to the harmonization drive and making efforts to align with each other.