ESG and SRI Portfolio Strategies: How to Balance Social Responsibility with Market Returns
Shareholders drive the performance and operational agenda of publicly traded companies. In the past, most companies held a superficial opinion of social responsibility or environmental issues because shareholders didn't seem to care as long as there were positive returns. The tides are changing.
Shareholders now want to know how companies are altering processes to account for environmental changes or how businesses stand up for workers' rights. As an investor, then, you now have more options for value-based investing without risking returns.
What Is ESG or SRI Investing?
ESG — environmental, social, governance — or sustainability investing refers to investing based on a company's management practices and ethics. ESG or SRI investing essentially represents an extension of the socially responsible investing space that values companies that produce positive contributions to society instead of focusing solely on profit maximization. According to recent S&P market reports, investors are now actively pushing companies to reflect on social and environmental impact, so much so that many businesses are refocusing their operational strategies. While it is still too early to tell whether ESG or SRI investing will provide sustainable and equivalent growth compared to more traditional strategies, investors now have more options when aligning retirement portfolios and investments with personal beliefs and values.
Why Should You Consider Such Strategies?
As a long-term investor, you should be looking beyond the headline financials of a company, taking into account environmental, social, and governance (ESG) factors. You are likely aware of how volatile the stock market can be, so when looking at a company's financial statements, be it for the short term or the long term, you should also understand the risk factors associated with that company. Companies that build renewable energy plants or focus on waste reduction don't fit into traditional valuation models. Still, when you consider the long-term gains and impacts, these renewable or waste-related technologies start to look attractive.
Additionally, every investor knows that popular opinion drives the market. With growing concerns of climate change, social responsibility, and corporate governance, investors want to hold companies accountable. Beyond the recent health threat and continued environmental concerns, society is focusing on fair wage practices and ethical management. While not new issues, they are issues with a growing acknowledgment, one that seemingly can no longer be ignored by businesses.
How Do ESG and SRI Portfolio Strategies Impact Returns?
You can find a wide variety of ways to combine values-based investment strategies with investment returns. These strategies allow you to combine returns based on ESG/SRI factors with your investment goals and risk tolerance. For instance, if you're focused on long-term capital growth, you might choose an SRI fund with an investment horizon that extends beyond the next five years. If you'd like higher returns, then you might pick an ESG fund or even a liquid SRI ETF that provides both growth and ethical investment options. ESG/SRI funds are becoming more mainstream in today's investment world, meaning greater opportunities for larger returns or more profit. However, as with any investment, there are risks, and it is still relatively early to prophetize returns with any certainty.
How To Balance Social Responsibility With Market Returns
The main takeaway from all of this is your values can drive your investment strategy. There are many examples of companies with high ESG ratings, which many investors believe should have higher price/earnings (P/E) ratios. Unfortunately, there are also poorly managed stocks, some with a poor track record, and some with a poor history of social responsibility. Successfully finding the balance between ESG considerations and financial performance is a problem for socially responsible investors, especially during downturns. However, with growing interest from investors, more companies are shifting their managerial and operational practices. Investing is always a risk, but now it can be a risk tied to your values.
What is your take on ESG and SRI strategies? Leave a comment below.