E(nvironmental) S(ocial) G(overnance) is an investment theme and strategy that has been growing in popularity in recent years. A recent Morningstar survey(1) found that over 70% of US investors expressed at least a moderate level of interest in incorporating their personal values into their investment portfolio.
At Firethorn, we currently offer clients low cost ETF portfolios that exclude certain industries and overweight companies with a high ESG weighting. We have also recently introduced mutual fund models incorporating a faith- based approach to portfolio construction. Additionally, we proudly participated in two capital raises (2019 and 2020) that targeted investments in affordable and government subsidized multifamily housing. For Q4 2020, we expect to rollout technology that will offer clients the ability to create custom screened stock portfolios based in their individual definition of ESG. This is especially exciting in the $0 commission landscape and the level of customization it will allow us to deliver to clients. That is the past, present and future of ESG at Firethorn, but let us dig a little deeper to better understand the growing popularity and phenomenon that is ESG.
Environmental, Social, and Corporate Governance are the three broad investment factors used to assess a company’s impact on society and sustainability. Modern impact investing traces its roots to the 1970s rejection of South African apartheid and the massive capital withdrawal by US investors from South African companies. This capital exodus was a leading cause in the takedown of apartheid. Evidence is starting to show that companies practicing positive ESG fundamentals will see increased capital flows from investors, which will lead to better future financial performance. It is interesting to think that companies that incorporate additional values besides just return on capital may possibly deliver a better return on their investor’s capital. There is a noticeable correlation developing over the last twelve to twenty-four months between capital flows and companies practicing sound ESG fundamentals. Firethorn is wagering that this momentum is going to continue and accelerate going forward.
So, what are more specific areas of impact investing? The E looks for companies committed to improving sustainability and positively impacting climate change. The S seeks out companies that practice diversity in their workforce, positively impact the health and wellbeing of their employees and surrounding communities, and ultimately protect the consumer. Values or faith-based investing are popular screens for investors seeking positive societal impact in their portfolios. The G focuses on monitoring a company’s management structure, executive/employee compensation ratio and relationship with its employees.
In closing, ESG is going to be a key determinant of quality and performance in our clients’ portfolios going forward. Our goal is to make sure that we offer you industry leading, innovative, and a highly personalized approach that is customized to your definition of ESG!
Next month we will review the results of the annual Firethorn client survey.