Investing With an Eye Toward the Greater Good

Above: Noel Friedman, MSCI, right, addresses a crowd as Samantha Azzarello, J.P. Morgan, left listens.

BY STEVE DINNEN

Investors deserve top guidance to build their portfolios, and a blossoming addition to their toolbox both helps them be wiser with their money and nudges companies to be wiser with the way they treat their customers, their employees and their environment. It helps a company become a better business and, hopefully, a better investment.

ESG—environment, government and social—is shorthand for an approach to investing that gives a look at a public company from many perspectives. Are they treating their workers right (no Chinese sweatshops)? Are they contributing to the betterment of mankind (maybe solar panel makers; definitely not tobacco)? Are they operating in an honorable fashion (take note, Volkswagen)? Do they need to prepare for climate change, or security threats? Bloomberg, which has developed a proprietary rating system for ESG, plugs 120 separate indicators into its model.

Local investors, mainly institutional managers from insurance companies, got a look at ESG during a presentation sponsored by the Certified Financial Analyst Society of Iowa. Presenters Samantha Azzarello, of J.P. Morgan Asset Management, and Noel Friedman, with MSCI, sorted out how ESG differs from other ways to look at stocks with an environmentally friendly eye—socially responsible investing, or SRI. This is not just a new version of SRI, but a more thorough look at the way a company conducts itself. A knock against SRI is that companies that follow its tenets are not necessarily rewarded share-price-wise, but that does not seem to be the case for ESG adapters.

Friedman says evidence so far indicates that returns are better for firms that use ESG guidelines. They tend to have higher cash flows, and an ability to deal with disruptive technology. Microsoft Corp. scores high on the list, as does Bank of America, whose chairman has even written that “our ESG practices are central to growing in a sustainable manner.”

The push for ESG has so far come from the institutional side, such as pension plans. But there is more ESG awareness by individuals, especially by younger investors, Azzarello says. And portfolio managers are increasingly signing on to the idea as big investment houses develop ESG measurement tools.
ESG ratings on companies are still a work in progress and vary depending on who is doing the rating. The easiest way to get ESG-friendly is to buy one of the many exchange-traded funds or mutual funds that are now employing ESG standards — think Invesco Summit (P), or Hotchkis & Wiley Large Cap (A). If you prefer an individual stock, just look up the fund’s portfolio.

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