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ESG Investment Update

I decided to take a break from the videos and give a quick update on ESG portfolios.  Some of you may be wondering – “What is an ESG portfolio?”   That’s completely expected as I spoke a bit about them a year or so ago.  The basic concept is ESG stands for Environmental, Social and corporate Governance funds. You know, “Do Good” funds😉  Simply, these are portfolios where companies that score higher on certain ESG measurements are included and those companies that score worse are excluded.  


As I dug deeper into ESG and even SRI funds (Socially Responsible Investing) it became more and more confusing.  The whole ESG concept is a bit of the Wild West right now.  It is so bad the SEC is talking about developing standards because currently there is no uniform definition of what truly is an ESG fund.   


Additionally, many of the ESG funds I came across were rather expensive. However, after some digging I found some lower cost options.  The rub was these funds were newer and simply I was not ready to start using them in client portfolios. Instead, I decided to be a guinea pig. About a year ago I built out an ESG-based model and used it for myself.   The results were rather eye-opening.   Below are some quick highlights.


  • At the end of last year, the performance of this portfolio was ahead of a comparable non-ESG portfolio. That was nice to see, but since many of these funds were newer I wanted to see what happened to them with a market correction.
  • Unfortunately, my wish was granted as we saw a serious and quick market correction earlier this year.  Surprisingly, these funds did better than their non-ESG benchmarks.
  • Their drawdowns (a nice way to say how much they dropped) were not as bad.
  • More importantly, their recoveries were quicker and higher.
  • The performance gaps since the inception of these funds was significant with the ESG funds being well ahead of the non-ESG ones, especially for US-based funds.


Now, there are a few key reasons for the performance differences. First, ESG funds typically do not invest heavily in energy-related stocks. Energy stocks fell more than any other sector earlier this year. Additionally, ESG is overweighted in technology companies, which continue to do well. Tech companies typically have a lower carbon footprint than other sectors.


What does all this mean?   A few things.  First, I am going to start offering a couple of ESG models for clients. Next, I am not going super deep with them.  I’ll leave deep dive ESG portfolios for the full-time investment pros who only focus in the ESG space.  Instead, you can think of my portfolios as an entry point for ESG investing and at a lower cost than others. Right now I am estimating costs for these portfolios to be around .30% (30 basis points).


Finally, you may be wondering what this means for you. Simply, I am trying to stay true to my firm name and be forward thinking. I will continue to utilize ESG funds for myself and am now ready to make them available for clients.  I cannot argue with the performance or the costs, plus doing good seems like what people would describe as a win-win.