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Sustainable Companies and Funds Outperforming in the Short- and Long-Term, Studies Find

2 min
21 Sep, 2023
By Fennel

What does sustainability have to do with financial performance? A 9-year analysis from Kroll and Morgan Stanley's mid-year 2023 report both indicate that sustainable investments aren’t just holding their own—they're outperforming other options.

 

Short-Term Returns

"In the first half of 2023, sustainable funds saw a median return of 6.9%, beating traditional funds’ 3.8%," says Morgan Stanley's Jessica Alsford. This data, highlighted in their Sustainable Reality report, showcases the resilience of ESG-focused investments in recent market conditions. Not only did these funds reverse their underperformance from the previous year, but they also attracted a staggering $57 billion in new inflows.

In terms of different asset classes, sustainable equity funds showed a greater difference, with a 10.9% median return vs. traditional equity funds’ 8%. Meanwhile, sustainable fixed income funds (i.e. bonds) saw median returns of 3.8%, which was nearly double the return of their traditional counterparts (at 2.2%). The report also highlights that assets under management (AUM) in sustainable funds have continued to grow in proportion to alternatives, now comprising close to 8% of the total global AUM in funds.

 

Long-Term Gains

For those looking at longer time horizons, the value proposition for ESG integration is even stronger. Kroll's study, which spanned nine years and examined more than 13,000 companies globally, revealed that companies with higher ESG ratings "generally outperformed" those with lower ratings. Specifically, companies categorized as ESG “leaders” had an average annual return of 12.9% over the nine-year period, compared to 8.6% for “laggard” companies.

In the U.S. alone, ESG leaders earned an annual compound return of 20.3%, compared to 13.9% for laggard companies. This represents an almost 50% premium in terms of relative performance by leading ESG companies, according to the study.

 

Where do sustainability & “ESG” belong?

Integrating ESG isn’t just about saving face; it's about balancing an investment approach to consider both short-term market dynamics and long-term value creation. "Despite short-term fluctuations in performance, sustainable funds appear to be holding steady [especially] for investors targeting longer-term horizons," notes the Sustainable Reality report.

While sustainability and corporate responsibility may be framed by some as mere talking points, the numbers reveal these factors may be essential to a well-rounded investment strategy. As Carla Nunes at Kroll puts it: "While time will tell whether the ESG label ultimately prevails, it doesn’t really matter because the premise behind the strategy isn’t going away."

 

Read more: 20 ESG ETFs Available On Fennel Right Now

 

Questions for Retail Investors to Consider:

∙ Do you think there is extra financial risk when investing in companies with unsustainable practices?

∙ How do you identify ESG-related risks?

∙ Do you look for opportunities associated with companies that innovate in their sustainability?

 

 

∙ ∙ ∙

The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member FINRA SIPC.

Expand your knowledge further

<p>How many times have we followed a trend just to fit in with the &ldquo;cool kids&rdquo; even if meant being untrue to ourselves? The reality is, many of us have fallen prey to peer pressure at some point. But individuals aren&rsquo;t the only ones who conform to a trend to stay relevant. Businesses do too, and because ESG (Environmental, Social, and Governance) and sustainability are the hot topics of today, many companies partake in something called &ldquo;greenwashing.&rdquo;&nbsp;</p> <p>&nbsp;</p> <h4><strong>Why greenwash?</strong></h4> <p><a href="https://earth.org/what-is-greenwashing/">Greenwashing</a>&nbsp;is defined as the process of making misleading statements, in order to market a company or its products as being environmentally sustainable.&nbsp;<a href="https://corporatefinanceinstitute.com/resources/knowledge/other/greenwashing/">Some examples of greenwashing are</a>:&nbsp;</p> <ul> <li aria-level="1">Making vague or false environmental claims that are not backed up by hard evidence or third-party certifications&nbsp;</li> <li aria-level="1">Placing emphasis on irrelevant issues (for example,&nbsp;saying a phone is &ldquo;CFC-free&rdquo; when CFCs are already banned by law)&nbsp;</li> <li aria-level="1">Hiding &ldquo;trade-offs&rdquo; &mdash; essentially, highlighting small&nbsp;environmental victories in order to mask a larger, potentially more concerning issue (for example, banks advertising their issuing of sustainable bonds while financing companies that harm the environment)&nbsp;</li> </ul> <p>Greenwashing is&nbsp;<a href="https://www.nasdaq.com/articles/are-companies-as-green-as-theyd-have-you-believe-2021-06-21">on the rise</a>&nbsp;as companies that boast of high ESG scores and sustainable practices are gaining traction in both financial and non-financial aspects. We&rsquo;ve seen the S&amp;P 500 ESG Index beat the S&amp;P 500 Index&nbsp;<a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">since the first market slump in early 2020</a>,&nbsp;<a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">record issuance</a>&nbsp;of sustainable bonds in the year 2021,&nbsp;<a href="https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">studies</a>&nbsp;that show ESG factors drive consumer preference, and customers&nbsp;<a href="https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/">willing to pay a premium to go green</a>. As a result, many companies may try to emulate this success by exaggerating how environmentally sustainable they really are.</p> <p>Some companies resort to greenwashing as they come under pressure to comply with environmental industry standards or regulatory requirements. One such example is when&nbsp;<a href="https://www.bbc.com/news/business-34324772">Volkswagen admitted to cheating</a>&nbsp;government-required emissions tests by fitting various vehicles with &ldquo;defeat devices.&rdquo;</p> <p>&nbsp;</p> <h4><strong>The rewards of being truly sustainable are sustainable</strong></h4> <p>What companies sometimes forget is that greenwashing is not sustainable (pun unintended). Those who greenwash risk getting exposed by an informed consumer or a gatekeeping group, which can backfire on the company&rsquo;s reputation. A recent example would be when&nbsp;<a href="https://www.dezeen.com/2019/08/02/hm-norway-greenwashing-conscious-fashion-collection-news/">H&amp;M launched its &ldquo;green&rdquo; clothing line called Conscious</a>. In this instance, the retailer claimed to use organic cotton and recycled polyester, but didn&rsquo;t provide enough evidence to back up its marketing. The company then faced criticism for misleading claims</p> <p>In the case that the truth behind an organization&rsquo;s greenwashing claims goes uncovered, it is still at a loss as it only enjoys the superficial benefits of being a &ldquo;responsible&rdquo; business. It doesn&rsquo;t reap the added value that actual sustainable business can receive &mdash; like&nbsp;<a href="https://www.bain.com/insights/sustainability-your-brands-next-cost-saving-weapon/">lower operational costs</a>,&nbsp;<a href="https://www.globenewswire.com/news-release/2019/01/10/1686144/0/en/CGS-Survey-Reveals-Sustainability-Is-Driving-Demand-and-Customer-Loyalty.html">loyal customers</a>, or&nbsp;<a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">positive shareholder returns</a>.</p> <p>&nbsp;</p> <h4><strong>Greenwashing faces legal implications in the future</strong></h4> <p>Most importantly, responsible ESG practices minimize regulatory and legal interventions, which in turn means less negative publicity and fines. This is exemplified in Volkswagen&rsquo;s case, wherein the car manufacturer was fined $125 million for its emissions scandal, and saw further losses as a result of having to recall close to 12 million of its cars worldwide. The spiral translated into&nbsp;<a href="https://fortune.com/2020/10/06/volkswagen-vw-emissions-scandal-damages/">business losses</a>&nbsp;and&nbsp;<a href="https://fortune.com/2015/09/23/volkswagen-stock-drop/">negative shareholder returns</a>.</p> <p>The greenwashing crackdown will continue with new environmental laws being written. The&nbsp;<a href="https://research.hktdc.com/en/article/MTAzNDU1OTc0Nw">EU has decided to amend its new consumer rules</a>&nbsp;to address greenwashing concerns, requiring producers to provide greater transparency on product information to avoid misleading claims. The UK is also targeting greenwashing with the Competition and Markets Authority&rsquo;s&nbsp;<a href="https://www.whitecase.com/publications/alert/uk-clampdown-greenwashing">Green Claims Code</a>.</p> <p>Organizations are driven towards greenwashing because of peer, consumer, or legal pressures. However, by doing so these businesses miss out on the true benefits of being sustainable.They also might expose themselves to the threat of legal action as more legislation is being drafted against greenwashing. As a result, these companies risk reputational damage, financial losses, and negative returns for stakeholders. Until regulators catch up to all the companies engaging in greenwashing, it&rsquo;s up to us to be on the lookout for common greenwashing tactics, and stay fully informed about the purchases and investments we make.</p> <p>&nbsp;</p> <p style="padding-left: 440px;"><strong>∙ ∙ ∙</strong></p> <p><em>The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member&nbsp;</em><a href="https://www.finra.org/"><em>FINRA</em></a><em>&nbsp;</em><a href="https://www.sipc.org/"><em>SIPC</em></a><em>.</em></p>
ESG
Environmental
What Is Greenwashing?

Greenwashing is a superficial and sometimes misleading way companies claim sustainability.

Shivani Hemnani
15 Aug, 2022
3 min read
<p><em>With financial markets around the world still reeling from muddled efforts to curb a global pandemic, one financial notion seems to be gaining fresh support: ESG. However, much about ESG remains unexplored. Are ESG and risk management practices related? How can ESG be used to benefit organizations and investors from a risk standpoint? Does one of the three ESG pillars play a bigger role in terms of generating financial returns, utility, and risk management?</em></p> <p>&nbsp;</p> <p>Some investors have a hypothesis that ESG investments generate stronger, more sustainable returns over the long term, and this has been exemplified in the past couple of years. ESG investments, indices, and companies that keep considerations of the three factors at the forefront of their culture have bounced back higher than unbothered counterparts; for example, the S&amp;P 500 ESG Index has beat the S&amp;P 500 Index <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">since the first market slump in early 2020</a>, sustainable bonds have seen <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">record issuance in the year 2021</a>, and organizations with good ESG ratings <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">have displayed strong financial resilience</a> since the economic downturn.</p> <p>How can this phenomenon be explained? The answer lies in the fact that <a href="https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html">ESG can work as a risk management strategy</a>; not just in financial terms, but also in view of management conditions and meeting regulatory requirements.</p> <p>A <a href="https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">report published by McKinsey</a> tells us that good ESG practices could potentially lead to positive cash flows, as well as hedge financial and reputational risks due to the following reasons:</p> <ul> <li>ESG drives consumer preference as some customers are <a href="https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/">willing to pay a premium to go green</a>. McKinsey also found that companies that use sustainable practices in their supply chain are able to cut costs.</li> <li>Responsible reporting minimizes regulatory and legal interventions, which generates less negative publicity for an organization.</li> <li>Having generous social policies in place helps motivate and retain staff, as well as increase employee productivity, which has been found to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869">positively correlate with shareholder returns.</a></li> <li>ESG practices help optimize investments and capital expenditures. One way to get ahead of the curve is to consider making investments into assets that take advantage of sustainability tailwinds. For example, China&rsquo;s efforts to curb air pollution is estimated to create <a href="http://www.chinadaily.com.cn/a/201804/18/WS5ad69dc6a3105cdcf6518f2c.html">over $3 trillion in investment opportunities across various industries</a> through 2030.</li> </ul> <p>&nbsp;</p> <h4><strong>Integrating ESG in business practices doubles as good risk management, which goes on to generate brand equity for companies and attract investors.</strong></h4> <p>Research has <a href="https://www.mdpi.com/2071-1050/12/1/254">found a positive relationship</a> between ESG scores and brand equity value of S&amp;P 500 companies. Good ESG incorporation mitigates reputational risks for an organization, and that is where investor confidence is built. In turn, investors manage financial risks by keeping exposures to ESG investments in their portfolios, which also helps them derive utility as they are inclined to feel that their investment decisions are part of a bigger movement to do better for the world.</p> <p>&nbsp;</p> <h4><strong>It's the Social and Governance factors that actually push away the risks.</strong></h4> <p>We constantly hear a lot of buzz surrounding the Environmental aspect which dominates sustainable investment allocations, but the value of the Social and Governance aspects which have a determining impact on sustainable practices, and as a result, risk management within an organization, are rarely ever given recognition.</p> <p>Taking a deep-dive into how the &ldquo;S&rdquo; and &ldquo;G&rdquo; areas are equally at play as the &ldquo;E&rdquo; in contributing to sound risk management within a company and yielding positive returns for investors, we delve into some research on how the three factors impact financial performance on an absolute basis.</p> <p>A <a href="https://www.google.com/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=&amp;ved=2ahUKEwi9kr_i48b3AhWTQc0KHfB2DUAQFnoECAYQAQ&amp;url=https%3A%2F%2Fjournals.vgtu.lt%2Findex.php%2FJBEM%2Farticle%2Fdownload%2F12725%2F9980&amp;usg=AOvVaw1dAd8rRWX31GFeB0IY3x9v">recent study</a> examined the overall and individual influences of corporate E, S, and G conduct on economic performance of S&amp;P 500 firms. A breakdown of the scores for each aspect across companies from different industries and their correlation with the respective companies&rsquo; economic performances were looked at. The results may be surprising at first look: Corporate &ldquo;E&rdquo; conduct does not have any significant effect on firm economic performance, while conduct for &ldquo;S&rdquo; and &ldquo;G&rdquo; significantly influences firm economic performance.</p> <p>The Social and Governance components are key to the general practices of risk management; aiming to do justice to these elements in the day-to-day course of running a business ensures responsible and skilled management structures, risk ownership, and compliance with regulatory requirements.</p> <p>Here we covered reasons to explain these occurrences in the market &mdash; that ESG is an exceptional risk management tool for organizations internally, and also for investors in financial terms. More importantly, we saw that &ldquo;S&rdquo; and &ldquo;G&rdquo; are crucial to building optimal risk practices within a firm, which when combined with &ldquo;E&rdquo;, enhance the attractiveness of businesses and generate solid returns over the long term for investors.</p> <p>&nbsp;</p> <p><strong><u>References</u></strong></p> <p>Ajour, E. et al. (2020). <em>The Role of Sustainability in Brand Equity Value in the Financial Sector. </em>MDPI. Retrieved April 29, 2022, from <a href="https://www.mdpi.com/2071-1050/12/1/254">https://www.mdpi.com/2071-1050/12/1/254</a></p> <p>BNP Paribas SA Group (2021). <em>BNP Paribas recognized by EcoVadis and FTSE4Good extra-financial ratings. </em>BNP Paribas. Retrieved May 06, 2022, from https://group.bnpparibas/en/news/bnp-paribas-recognized-by-ecovadis-and-ftse4good-extra-financial-ratings</p> <p>Cek, K. &amp; Eyupoglu, S. (2020). <em>Does environmental, social and governance performance influence economic performance? </em>Scopus. Retrieved April 29, 2022, from <a href="https://www.scopus.com/record/display.uri?eid=2-s2.0-85087457813&amp;origin=inward&amp;txGid=4864f78cdc725470874f18fec147c309&amp;featureToggles=FEATURE_NEW_DOC_DETAILS_EXPORT:1">https://www.scopus.com/record/display.uri?eid=2-s2.0-85087457813&amp;origin=inward&amp;txGid=4864f78cdc725470874f18fec147c309&amp;featureToggles=FEATURE_NEW_DOC_DETAILS_EXPORT:1</a></p> <p>Cheasty, G. (2019). <em>Asset Management: Integrating ESG Risk into a Risk Management Framework.</em> Deloitte. Retrieved April 22, 2022, from <a href="https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html">https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html</a></p> <p>Dorobantu, S., Henisz, W. &amp; Nartey, L. (2022). <em>Spinning gold: The financial returns to stakeholder engagement. </em>Wiley Online Library. Retrieved May 09, 2022, from <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2180">https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2180</a></p> <p>Edmans, A. (2011). <em>Does the stock market fully value intangibles? Employee satisfaction and equity prices. </em>ScienceDirect. Retrieved May 09, 2022, from <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869">https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869</a><br /><br />Henisz, W., Koller, T., and Nuttall, R. (2019). <em>Five ways that ESG creates value. </em>McKinsey Quarterly. Retrieved May 09, 2022, from https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx</p> <p>Lawrence, E., &amp; Zlatkova, S. (2020). <em>Managing risk with ESG investing - CFA society chicago</em>. Northern Trust Asset Management. Retrieved April 26, 2022, from <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf</a></p> <p>Murugaboopathy, P., &amp; Dogra, G. (2021). <em>Global sustainable bonds see record issuance in Jan-Sept 2021</em>. Reuters. Retrieved April 26, 2022, from <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/</a></p> <p>S&amp;P Global. (2022). <em>S&amp;P 500 ESG Index</em>. S&amp;P Dow Jones Indices. Retrieved April 22, 2022, from <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview</a></p> <p>&nbsp;</p> <p style="padding-left: 440px;"><strong>∙ ∙ ∙</strong></p> <p><em>The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member&nbsp;</em><a href="https://www.finra.org/"><em>FINRA</em></a><em>&nbsp;</em><a href="https://www.sipc.org/"><em>SIPC</em></a><em>.</em></p>
ESG
Investing
How Does ESG Relate to Risk Management?

Some investors have a hypothesis that ESG investments generate stronger, more sustainable returns over the long term.

Shivani Hemnani
25 Aug, 2022
4 min read
<p><span style="font-weight: 400;">Are you an investor who cares not only about the performance of your portfolio, but also how your investments affect the environment, society, or humanity as a whole?</span></p> <p><span style="font-weight: 400;">If you do, you&rsquo;re not alone. There are many investors who invest based on their own morals, what they think is ethical, or to achieve a certain social goal. In fact, this type of investing is so popular that there are a handful of different terms that refer to the practice of aligning your investments with your values.</span></p> <p><span style="font-weight: 400;">You may have heard of impact investing, sustainable investing, socially-responsible investing, or ESG, but what do all these terms actually mean? And how do they differ?</span></p> <p>&nbsp;</p> <p><span style="font-weight: 400;">Let&rsquo;s define some of the commonly used terms:</span></p> <p>&nbsp;</p> <p><strong>ESG &mdash; </strong><span style="font-weight: 400;">Stands for </span><a href="https://fennel.com/fennel101/esg"><span style="font-weight: 400;">Environmental, Social, and Governance</span></a><span style="font-weight: 400;">. A framework for assessing companies beyond solely financial data, by looking at that company&rsquo;s impact on the environment, its impact on society, and how that company is organized. ESG is about better understanding a company by taking into account this information.</span></p> <p>&nbsp;</p> <p><strong>ESG investing &mdash; </strong><span style="font-weight: 400;">Involves incorporating ESG data in order to make investment decisions. Traditionally, ESG investing is </span><a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management"><span style="font-weight: 400;">viewed as a form of risk management</span></a><span style="font-weight: 400;">, where ESG is used to identify companies that are managed sustainably and avoid those that could face regulatory scrutiny. However, ESG investing is often grouped together with socially responsible investing or sustainable investing &mdash; even though technically those refer to different strategies.</span></p> <p>&nbsp;</p> <p><strong>Ethical investing &mdash; </strong><span style="font-weight: 400;">Using your personal code of ethics to determine what to invest in. This differs from investor to investor. One person may think ethical investing involves divesting from companies that test on animals, while another person may not care about animal testing and instead focus on avoiding companies that benefit from child labor.</span></p> <p>&nbsp;</p> <p><strong>Impact investing &mdash;</strong><span style="font-weight: 400;"> According to the </span><a href="https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing"><span style="font-weight: 400;">Global Impact Investing Network</span></a><span style="font-weight: 400;">, impact investing refers to making investments &ldquo;with the intention to generate positive, measurable social and environmental impact alongside a financial return.&rdquo;</span></p> <p><span style="font-weight: 400;">Impact investing is a broad term, but in order to qualify as impact investing the investor should have the desire to create a positive, the ability to measure that impact, the evidence to inform that investment decision, and the goal of also generating returns in the end.</span></p> <p>&nbsp;</p> <p><strong>Socially responsible investing (SRI) &mdash;</strong><span style="font-weight: 400;"> Involves investing in something based on how that investment impacts the environment, society, or the greater good. The concept of SRI has been around for decades (at least) and is sometimes used interchangeably with ethical investing and sustainable investing.</span></p> <p>&nbsp;</p> <p><strong>Sustainable investing &mdash;</strong><span style="font-weight: 400;"> According to </span><a href="https://online.hbs.edu/blog/post/sustainable-investing"><span style="font-weight: 400;">Harvard Business School</span></a><span style="font-weight: 400;">, sustainable investing refers to &ldquo;a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value&rdquo; &mdash; emphasis on </span><em><span style="font-weight: 400;">long-term</span></em><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">Sustainable investing often is associated with investing in green energy or environmentally-friendly practices because the word &ldquo;sustainable&rdquo; is often used in that setting</span></p> <p>&nbsp;</p> <p><strong>Values-based investing &mdash;</strong><span style="font-weight: 400;"> Similar to ethical investing, values-based investing involves making investment decisions based on a person&rsquo;s own set of values. Sometimes those values reflect a person&rsquo;s morals or religion, and other times they reflect a more generalized set of beliefs. Regardless of what those beliefs are, a values-based approach depends on the individual investor.&nbsp;</span></p> <p>&nbsp;</p> <h4><strong>Which approach is best for you?</strong></h4> <p><span style="font-weight: 400;">After going through all of these terms, you may have noticed that there are a lot of similarities. Sometimes the differences between these approaches depend on the intention or end goal, other times it just comes down to semantics.</span></p> <p><span style="font-weight: 400;">Hopefully, next time you hear one of these terms get tossed around you&rsquo;ll have a better understanding of what it means. This understanding may help you make your own investing decisions going forward.</span></p> <p>&nbsp;</p> <p style="padding-left: 440px;"><strong>* * *</strong></p> <p><span style="font-weight: 400;">The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member </span><a href="http://finra.org"><span style="font-weight: 400;">FINRA</span></a><span style="font-weight: 400;"> </span><a href="https://www.sipc.org/"><span style="font-weight: 400;">SIPC</span></a><span style="font-weight: 400;">.</span></p>
ESG
Investing
ESG vs SRI: What Do All the Terms Mean?

There are a lot of terms used in the world of impact investing, what do they all mean?

Fennel
01 Nov, 2022
2 min read
<p><span style="font-weight: 400;">There are several different ways to incorporate </span><a href="https://fennel.com/fennel101/esg"><span style="font-weight: 400;">ESG</span></a><span style="font-weight: 400;"> into your portfolio, because ESG investing isn&rsquo;t a one-size-fits-all approach.</span></p> <p><span style="font-weight: 400;">ESG investing involves using a company&rsquo;s environmental, social, and governance data to guide investing decisions. But a lot of information falls into those three buckets, and which data points to focus on and how to use that data may vary from investor to investor.</span></p> <p><span style="font-weight: 400;">On top of that, different investors may have different reasons they&rsquo;re using ESG. Maybe they hope to </span><a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management"><span style="font-weight: 400;">use ESG as a form of risk management</span></a><span style="font-weight: 400;">, by looking for long-term business viability and avoiding businesses that may face regulatory liabilities. Or maybe they want to use ESG to invest in companies that align with their personal values.</span></p> <p><span style="font-weight: 400;">One of the popular ways investors incorporate ESG data into their portfolios is through </span><a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management"><span style="font-weight: 400;">ESG screening</span></a><span style="font-weight: 400;">, which involves including or excluding companies based on their ESG performance. However, this approach differs from a technique many impact investment funds do &mdash; active ownership.</span></p> <p><span style="font-weight: 400;">Let&rsquo;s examine these two different ESG investing approaches to better understand the pros and cons of each.</span></p> <p><br /><br /></p> <h4><strong>The Positives and Negatives of Screening</strong></h4> <p><span style="font-weight: 400;">ESG screening comes in two different forms &mdash; positive screening and negative screening. Both approaches are relatively straightforward. Positive screening involves investing in companies based on certain ESG factors, while negative screening involves excluding companies from your portfolio or divesting.</span></p> <p><span style="font-weight: 400;">Positive and negative screening are really just two sides of the same coin, and can be done in tandem. In order to incorporate screening into your portfolio, all you need is relevant ESG data and a personal strategy of what you want to invest in or avoid.</span></p> <p><span style="font-weight: 400;">For example, if you want to construct a portfolio of women-led businesses, you need access to the gender breakdown of a company&rsquo;s board of directors or leadership team. That way you can positively screen women-led companies into your portfolio. If you see that some of the companies already in your portfolio have no women in leadership positions, then you may want to negatively screen them out.</span></p> <p><span style="font-weight: 400;">Provided that you have the proper ESG data, it&rsquo;s relatively easy to incorporate ESG into your portfolio this way.</span></p> <p><span style="font-weight: 400;">Screening can help investors who are using ESG from a risk management perspective. If they believe the global transition to renewable energy will benefit green energy companies and hurt traditional fossil fuel companies, they can use ESG screening to make sure their portfolio aligns with that hypothesis.</span></p> <p><span style="font-weight: 400;">Screening can also help investors who want to make sure their investments are aligned with their personal values. This sort of investing happens all the time, whether it&rsquo;s </span><a href="https://fennel.com/blog/why-are-students-pushing-universities-to-divest"><span style="font-weight: 400;">universities divesting from oil companies</span></a><span style="font-weight: 400;"> after student pressure, protesters </span><a href="https://michiganintheworld.history.lsa.umich.edu/antivietnamwar/exhibits/show/exhibit/military_and_the_university/dow_chemical"><span style="font-weight: 400;">divesting from napalm manufacturers</span></a><span style="font-weight: 400;"> during the Vietnam War, or </span><a href="https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/sin-stocks.html"><span style="font-weight: 400;">religious investors divesting from &ldquo;sinful&rdquo; industries</span></a><span style="font-weight: 400;"> like gambling or drug use.</span></p> <p><span style="font-weight: 400;">Screening is popular in </span><a href="https://financebuzz.com/values-based-investing"><span style="font-weight: 400;">values-based investing</span></a><span style="font-weight: 400;"> and </span><a href="https://www.nerdwallet.com/article/investing/ethical-investing"><span style="font-weight: 400;">ethical investing</span></a><span style="font-weight: 400;">, which have both been around for a long time. But what if you&rsquo;re an impact investor who wants to use their investment to promote some sort of change? Sure, positive screening may help promote the companies you do invest in, but negative screening can leave you out of the conversation for the companies you may want to change, which could create an echo chamber effect. That&rsquo;s why some impact investors are turning to a more hands-on approach known as active ownership (or active engagement).</span></p> <p><br /><br /></p> <h4><strong>What Is Active Ownership?</strong></h4> <p><span style="font-weight: 400;">Active ownership involves using one&rsquo;s position as a shareholder to push a company towards positive change. This can be done through things like </span><a href="https://fennel.com/fennel101/shareholder-voting"><span style="font-weight: 400;">shareholder voting</span></a><span style="font-weight: 400;">, attending annual shareholder meetings, putting forward shareholder proposals, and so on.</span></p> <p><span style="font-weight: 400;">A famous example of active ownership at work is Engine No. 1&rsquo;s </span><a href="https://www.reuters.com/business/little-engine-no-1-beat-exxon-with-just-125-mln-sources-2021-06-29/"><span style="font-weight: 400;">board takeover of ExxonMobil</span></a><span style="font-weight: 400;">. In 2020, Engine No. 1, a relatively unknown activist hedge fund, acquired a small stake in the oil giant ExxonMobil. Although Engine No. 1&rsquo;s shares only represented about 0.02% of the company, the hedge fund was able to use its shareholder status to put forward a handful of shareholder proposals and nominate new members to Exxon&rsquo;s board of directors. After getting support from large asset managers like BlackRock, Vanguard, and State Street, Engine No. 1 was able to win </span><a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/"><span style="font-weight: 400;">three of Exxon&rsquo;s board seats</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">Why did Engine No. 1 care about winning board seats? The hedge fund had three main goals: to bring independent directors with energy experience to Exxon&rsquo;s board, to promote better long-term capital allocation, and to implement a strategic plan for Exxon&rsquo;s business in a world that is rapidly moving towards sustainability and decarbonization.</span></p> <p><span style="font-weight: 400;">Since Engine No. 1&rsquo;s board takeover, Exxon has </span><a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/"><span style="font-weight: 400;">made several commitments</span></a><span style="font-weight: 400;"> to lowering its greenhouse gas emissions and invested billions of dollars into low carbon solutions.</span></p> <p>&nbsp;</p> <h4><strong>Implementing Active Ownership Into Your Portfolio</strong></h4> <p><span style="font-weight: 400;">Okay, so all you have to do to implement active ownership into your portfolio is target a multinational company, wage a months-long shareholder campaign, and get some of the largest asset managers in the world to support your cause? Well, not exactly.</span></p> <p><span style="font-weight: 400;">Screening may seem easy to incorporate into your portfolio because it just involves including or excluding companies based on ESG data. Active ownership may take a little bit more work, but it could be as simple as using your shares to vote.</span></p> <p><span style="font-weight: 400;">"If you're a shareholder of a company, you should be active. Active ownership is really important,&rdquo; Yusuf George, Managing Director of Engine No. 1, said at </span><a href="https://medium.com/fennelapp/a-recap-of-socap-2022-875a0cc53fb"><span style="font-weight: 400;">a recent SOCAP event</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">&ldquo;Part of the reason [Engine No. 1] talks so much about the energy sector, the transportation sector, and agriculture is because they account for about 75% of greenhouse gas emissions. We want to go where the problems are, because if we don't, nothing will change. And so we believe that it's really important to use any tool you have &mdash; it can be voting your shares, showing up at an annual general meeting, whatever tool you have to be an active owner is really important."</span></p> <p><span style="font-weight: 400;">As Yusuf George points out, leaning into the problem is important because it could help lead to change. While exclusionary screening may work for a risk management approach, active ownership may lead to a greater impact on the company.</span></p> <p><span style="font-weight: 400;">If your goal as an investor is to have an impact, then it could be worth it to use ESG data to identify opportunities for impact within a company. Then you could use your position as a shareholder to push for change with whatever tools you have &mdash; whether that&rsquo;s voting, putting forward proposals, or just spreading awareness of issues.</span></p> <p>&nbsp;</p> <p><em><span style="font-weight: 400;">Risk Disclosure:</span></em></p> <p><em><span style="font-weight: 400;">Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.</span></em></p> <p style="padding-left: 400px;"><strong>∙ ∙ ∙</strong></p> <p><em>The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member&nbsp;<a href="http://finra.org/">FINRA</a>&nbsp;<a href="https://www.sipc.org/">SIPC</a>.&nbsp;</em></p>
ESG
Shareholder Activism
Screening vs Active Ownership: Different Ways To Incorporate ESG Into Your Portfolio

Active ownership could help ESG investors push for more impactful change.

Fennel
28 Nov, 2022
4 min read
<p><span style="font-weight: 400;">By now, you may already know that some investors use </span><a href="https://fennel.com/fennel101/esg"><span style="font-weight: 400;">environmental, social, and governance (ESG)</span></a><span style="font-weight: 400;"> data to understand a company&rsquo;s impacts outside of purely financial measurements. But companies pay attention to ESG too, and many try to shape their own ESG impact through something called an ESG policy.</span></p> <p>&nbsp;</p> <p class="p1"><em>Note:</em></p> <p class="p1"><em>The returns on a portfolio consisting primarily of Environmental, Social and Governance (&ldquo;ESG&rdquo;) aware, impact investing, or faith-based investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on financial considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.</em></p> <p class="p1">&nbsp;</p> <h4><strong>What is an ESG policy?</strong></h4> <p><span style="font-weight: 400;">An ESG policy is an official commitment that companies make in order to manage their ESG impacts. A company with an ESG policy will often set goals for how it wants its business to perform across environmental, social, and governance categories.</span></p> <p><span style="font-weight: 400;">Sometimes, a company will make several official commitments that fall into its ESG policy, like a &ldquo;sustainability policy,&rdquo; &ldquo;sustainable development goals policy,&rdquo; &ldquo;corporate social responsibility policy,&rdquo; or &ldquo;governance policy.&rdquo; Although these can be narrow in focus, commitments made in those guidances often affect a company&rsquo;s overall ESG impact.</span></p> <p>&nbsp;</p> <h4><strong>Why have an ESG policy?</strong></h4> <p><span style="font-weight: 400;">In the eyes of ESG advocates, adopting an ESG policy is simply good business practices. But there are a handful of reasons why a company may want to consider instituting an ESG policy.</span></p> <p><span style="font-weight: 400;">One reason is that it communicates to investors that the company is serious about ESG. Earlier this year, Bloomberg Intelligence analysts </span><a href="https://www.bloomberg.com/company/press/esg-may-surpass-41-trillion-assets-in-2022-but-not-without-challenges-finds-bloomberg-intelligence/"><span style="font-weight: 400;">predicted</span></a><span style="font-weight: 400;"> that global ESG assets could surpass $41 trillion in 2022. Although that number may be off due to this year&rsquo;s downturn in the market, the report also predicted that number could grow to $50 trillion by 2025 &mdash; showing a growing interest in ESG by investors. A company may want to show its ESG worthiness to ESG conscious investors, so adopting an ESG policy could help do that.</span></p> <p><span style="font-weight: 400;">Another reason to adopt an ESG policy comes down to risk management. Traditionally, good performance across ESG categories </span><a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management"><span style="font-weight: 400;">has been linked</span></a><span style="font-weight: 400;"> to minimizing a company&rsquo;s exposure to business risks. How? Reducing exposure to fossil fuels can be useful in a rapidly decarbonizing world, adamantly avoiding polluting can help a business steer clear of government fines, appropriate employee management can help companies attract new talent and stay away from scandals, and proper governance can help prevent fraud. Scenarios like these show tangible business reasons for adopting ESG policies &mdash; beyond simply &ldquo;feeling good&rdquo; about one&rsquo;s impact.</span></p> <p>&nbsp;</p> <h4><strong>What does an ESG policy look like in practice?</strong></h4> <p><span style="font-weight: 400;">It should be no surprise that many of the largest publicly traded companies have already instituted ESG policies. Let&rsquo;s take a look at some of them to understand what an ESG policy looks like in practice.</span></p> <p><em><span style="font-weight: 400;">(Note: the companies included in this list have been picked due to their large market capitalization. This should not be seen as an endorsement of whether or not to invest.)</span></em></p> <p>&nbsp;</p> <p><strong>Microsoft</strong></p> <p><span style="font-weight: 400;">Instead of outwardly calling out a singular ESG policy, tech giant Microsoft discloses </span><a href="https://www.microsoft.com/en-us/corporate-responsibility"><span style="font-weight: 400;">its several commitments to corporate social responsibility</span></a><span style="font-weight: 400;">. These commitments include </span><a href="https://www.microsoft.com/en-us/corporate-responsibility/sustainability"><span style="font-weight: 400;">a policy on environmental sustainability</span></a><span style="font-weight: 400;">, which outlines plans to be carbon and waste neutral by 2030, replenish more water than it uses by 2030, as well as a handful of other environmental actions. Microsoft&rsquo;s CSR strategy also </span><a href="https://www.microsoft.com/en-us/corporate-responsibility"><span style="font-weight: 400;">highlights a handful of social policies</span></a><span style="font-weight: 400;">, including commitments inclusive to economic growth, protecting fundamental human rights, and earning trust from Microsoft&rsquo;s customers, employees, and communities. And lastly, Microsoft&rsquo;s governance policy </span><a href="https://www.microsoft.com/en-us/Investor/corporate-governance/framework.aspx"><span style="font-weight: 400;">establishes a framework</span></a><span style="font-weight: 400;"> for the company&rsquo;s board of directors to operate under.</span></p> <p><span style="font-weight: 400;">When all of these commitments are looked at in tandem, they represent a pretty comprehensive ESG policy.</span></p> <p>&nbsp;</p> <p><strong>Apple</strong></p> <p><span style="font-weight: 400;">Apple puts together an ESG report every year for its investors. Although an ESG report isn&rsquo;t exactly the same as an ESG policy &mdash; ESG reports detail past progress, while ESG policies are guidelines that are future-facing &mdash; the company&rsquo;s annual report includes many commitments to ESG factors. Apple calls out its specific values in </span><a href="https://s2.q4cdn.com/470004039/files/doc_downloads/2022/08/2022_Apple_ESG_Report.pdf"><span style="font-weight: 400;">the 2022 ESG report</span></a><span style="font-weight: 400;">, which include accessibility, education, environment, inclusion and diversity, privacy, and supplier responsibility &mdash; stating that these values are central to its &ldquo;ESG approach.&rdquo; More specifically, the company has also published its policies on things like </span><a href="https://s2.q4cdn.com/470004039/files/doc_downloads/gov_docs/2020/Apple-Human-Rights-Policy.pdf"><span style="font-weight: 400;">human rights</span></a><span style="font-weight: 400;"> and </span><a href="https://www.apple.com/supplier-responsibility/pdf/Apple_SR_2022_Progress_Report.pdf"><span style="font-weight: 400;">doing business with suppliers</span></a><span style="font-weight: 400;">.</span></p> <p>&nbsp;</p> <p><strong>Alphabet</strong></p> <p><span style="font-weight: 400;">Alphabet, the parent company of Google and YouTube (among others), details its ESG policies on its </span><a href="https://abc.xyz/investor/other/sustainability-and-related-information/"><span style="font-weight: 400;">investors relations site</span></a><span style="font-weight: 400;">. Among these policies are commitments to data security, employee diversity, environmental sustainability, supply chain responsibility, as well as reports disclosing ESG data across its businesses. Alphabet also made a splash when it issued $5.75 billion in sustainability bonds, and in 2022 it </span><a href="https://www.gstatic.com/gumdrop/sustainability/alphabet-2022-sustainability-bond-impact-report.pdf"><span style="font-weight: 400;">outlined</span></a><span style="font-weight: 400;"> how this money will be spent &mdash; on things like clean energy, circular economy, affordable housing, and commitments to racial equity.</span></p> <p><br /><br /></p> <p><strong>Amazon</strong></p> <p><span style="font-weight: 400;">Amazon has </span><a href="https://sustainability.aboutamazon.com/"><span style="font-weight: 400;">a website</span></a><span style="font-weight: 400;"> dedicated to its sustainability efforts across the environment, society, and its governance. On this page, it calls out several of the commitments it has made. This includes its plans to </span><a href="https://sustainability.aboutamazon.com/environment/renewable-energy?energyType=true"><span style="font-weight: 400;">use 100% renewable energy by 2025</span></a><span style="font-weight: 400;">, its efforts to </span><a href="https://sustainability.aboutamazon.com/environment/packaging"><span style="font-weight: 400;">create more sustainable packaging</span></a><span style="font-weight: 400;">, the </span><a href="https://sustainability.aboutamazon.com/society/employees"><span style="font-weight: 400;">benefits it offers to employees</span></a><span style="font-weight: 400;">, and more.</span></p> <p>&nbsp;</p> <h4><strong>What do these ESG policies have in common and how do they differ?</strong></h4> <p><span style="font-weight: 400;">After going through the ESG policies of a handful of companies, you may notice how some of them are similar while others are unique. ESG policies are designed based on the individual operations of a business. That&rsquo;s why Amazon has a policy about making its packaging more sustainable, while Apple has a policy about how it chooses suppliers for its hardware.</span></p> <p><span style="font-weight: 400;">These policies help businesses develop more sustainable practices and help set themselves up for success over the long term. They also tell investors and the world that these companies are being proactive about ESG.</span></p> <p>&nbsp;</p> <p style="text-align: center;"><strong>∙ ∙ ∙</strong></p> <p><em><span style="font-weight: 400;">The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member </span></em><a href="http://finra.org/"><em><span style="font-weight: 400;">FINRA</span></em></a><em><span style="font-weight: 400;"> </span></em><a href="https://www.sipc.org/"><em><span style="font-weight: 400;">SIPC</span></em></a><em><span style="font-weight: 400;">.&nbsp;</span></em></p>
ESG
What Is an ESG Policy? How Are They Used?

Proactive companies prioritize ESG in their business practices.

Fennel
11 Jan, 2023
4 min read
<p><span style="font-weight: 400;">When investors want to understand the way a market is performing, they often look at a market index. An index is a tool that is used to measure the performance of a certain group of assets, typically by taking the weighted average of those assets in order to create a representative sample.</span></p> <p><span style="font-weight: 400;">There are many different types of indices. One that has been in the news a lot recently is the </span><a href="https://www.bls.gov/cpi/#:~:text=The%20Consumer%20Price%20Index%20(CPI,U.S.%20and%20various%20geographic%20areas."><span style="font-weight: 400;">Consumer Price Index</span></a><span style="font-weight: 400;">, which measures the average price change over time for a select group of consumer goods and services. People have been paying attention to this index because it provides a useful way to measure inflation in the US, especially in terms of how it&rsquo;s felt by your average consumer.</span></p> <p><span style="font-weight: 400;">Some other indices you may have heard of are the </span><a href="https://www.britannica.com/topic/SandP-500"><span style="font-weight: 400;">S&amp;P 500</span></a><span style="font-weight: 400;"> and </span><a href="https://www.britannica.com/topic/Dow-Jones-average"><span style="font-weight: 400;">Dow Jones Industrial Average</span></a><span style="font-weight: 400;">, which both measure stock market performance by looking at either a group of 500 American publicly traded companies (S&amp;P 500) or a basket of 30 industrial stocks (DJIA).</span></p> <p><span style="font-weight: 400;">Indices are popular tools to help track markets, regardless of whether those markets are broad or more niche. So it should come as no surprise that some investors use ESG indices in order to follow the performance of companies that prioritize their </span><a href="https://fennel.com/fennel101/esg"><span style="font-weight: 400;">environmental, social, and governance</span></a><span style="font-weight: 400;"> practices.</span></p> <p>&nbsp;</p> <h4><strong>What is an ESG index?</strong></h4> <p><span style="font-weight: 400;">An ESG index is a collection of stocks of companies that exhibit high ESG performance. Like other indices, an ESG index is designed to act as a market benchmark, specifically for companies that prioritize ESG within their business operations.</span></p> <p><span style="font-weight: 400;">These ESG indices can help investors track high-performing ESG companies, compare those companies to the broader market, or provide an investment opportunity through an affiliated ETF or mutual fund.</span></p> <p><span style="font-weight: 400;">ESG indices are often put together by a company that provides its own ESG rating system, or by a financial institution that tracks the market. Each ESG index has its own method of picking stocks to be included, rebalancing over time, weighing underlying assets, and taking averages. So each ESG index provides a unique benchmark.</span></p> <p>&nbsp;</p> <p><strong>Here are some examples of different ESG indices, as well as what makes them unique.</strong></p> <p><em><span style="font-weight: 400;">(This list is intended for educational purposes only, and should not be seen as an endorsement to invest. Employing ESG strategies may not result in favorable investment performance.)</span></em></p> <p>&nbsp;</p> <p><strong>S&amp;P 500 ESG Index</strong></p> <p><span style="font-weight: 400;">S&amp;P Global&rsquo;s S&amp;P 500 index provides a market cap-weighted index of 500 large publicly traded companies. As mentioned before, it&rsquo;s a popular index for investors who want a snapshot of the US stock market.</span></p> <p><span style="font-weight: 400;">But to turn the S&amp;P 500 into an ESG index, S&amp;P Global analyzed its list of 500 companies to find the top ESG performers and filter out the companies involved in controversial weapons, tobacco, coal production, or companies that had disqualifying UN Global Compact scores. As of 2022, around 300 of the original 500 companies are included in the S&amp;P 500 ESG index.</span></p> <p><span style="font-weight: 400;">This makes the S&amp;P 500 ESG index a more exclusive list than its parent index. And since the S&amp;P 500 ESG index has significant overlap with the S&amp;P 500, some investors like to compare the two indices to see if companies that prioritize ESG actually outperform their counterparts.</span></p> <p>&nbsp;</p> <p><strong>S&amp;P SmallCap 600 ESG Index</strong></p> <p><span style="font-weight: 400;">Similar to how S&amp;P Global took its S&amp;P 500 benchmark and refined it using an ESG lens, the organization did the same thing for its index tracking small cap companies.</span></p> <p><span style="font-weight: 400;">While the S&amp;P 500 tracks 500 public companies with large market capitalizations, the S&amp;P SmallCap 600 index tracks companies with a market capitalization between $850 million and $3.7 billion. So the S&amp;P SmallCap 600 ESG index uses S&amp;P Global&rsquo;s same methodology to pick out the top ESG performers from the SmallCap index and exclude companies involved in controversial practices.</span></p> <p><span style="font-weight: 400;">S&amp;P Global actually has </span><a href="https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-esg-index-series.pdf"><span style="font-weight: 400;">a number of different ESG indices</span></a><span style="font-weight: 400;"> that it creates by refining one of its parent indices, or by compiling different ESG indices to create a composite index. These indices are meant to provide benchmarking for companies based on their market cap, geography, and more (as well as their ESG performance).</span></p> <p>&nbsp;</p> <p><strong>Refinitiv/S-Network ESG Best Practices Indices</strong></p> <p><span style="font-weight: 400;">ESG data provider Refinitiv has developed a handful of ESG indices that fall under its Refinitiv/S-Network ESG Best Practices Indices umbrella. This includes the Refinitiv/S-Network US Large-Cap ESG Best Practices Index, Refinitiv/S-Network US Large-Cap Environmental Best Practices Index, Refinitiv/S-Network US Large-Cap Social Best Practices Index, Refinitiv/S-Network US Large-Cap Governance Best Practices Index, Refinitiv/S-Network Emerging markets ESG Best Practices Index, and a handful of others.</span></p> <p><span style="font-weight: 400;">These indices take the ESG rating system developed by Refinitiv and S-Network in order to provide a benchmark that tracks the top ESG performers. Altogether, these indices represent over 11,000 companies, which have been analyzed across more than 630 ESG performance indicators.</span></p> <p>&nbsp;</p> <p><strong>The Refinitiv Global Resource Protection Select Index</strong></p> <p><span style="font-weight: 400;">While the Refinitiv/S-Network ESG Best Practices Indices look at ESG performance across more than 630 indicators, the Refinitiv Global Resource Protection Select Index narrows its scope by focusing on companies that perform well under Refinitiv&rsquo;s &ldquo;Resource Use&rdquo; category.</span></p> <p><span style="font-weight: 400;">This means that companies included in the index have displayed efforts to reduce their materials, energy, or water usage, as well as made an effort to implement more sustainable efforts in their supply chain management.</span></p> <p>&nbsp;</p> <p><strong>MSCI USA ESG Select Index</strong></p> <p><span style="font-weight: 400;">Morgan Stanley Capital International put together its MSCI USA ESG Select Index by compiling companies with positive environmental, social, and governance factors that display similar risk and returns metrics to its more broad MSCI USA Index. The index is designed to maximize exposure to ESG factors by providing more weight to companies with high ESG ratings, and less to companies with low ESG ratings.</span></p> <p>&nbsp;</p> <p><strong>MSCI KLD 400 Social Index</strong></p> <p><span style="font-weight: 400;">An honorable mention goes to the MSCI KLD 400 Social Index, which evolved from the Domini 400 Social Index &mdash; one of the oldest ESG indices that still exists.</span></p> <p><span style="font-weight: 400;">The Domini 400 Social Index was created in 1990, over a decade before the term &ldquo;ESG&rdquo; </span><a href="https://www.euromoney.com/article/294dqz2h1pqywgbyh3zls/esg/the-united-nations-free-thinkers-who-coined-the-term-esg-and-changed-the-world"><span style="font-weight: 400;">was coined</span></a><span style="font-weight: 400;">. This index was designed to track companies suitable for the &ldquo;socially-responsible investing&rdquo; movement, and has since evolved to incorporate the more standardized criteria that ESG provides.</span></p> <p>&nbsp;</p> <p><strong>Morningstar Global Markets Sustainability Index</strong></p> <p><span style="font-weight: 400;">Financial services company Morningstar has a handful of ESG indices. Among them is its Morningstar Global Markets Sustainability Index, which is designed to reduce the risk caused by issues related to poor performance in environmental, social, and governance factors. Companies included in the list are from the Morningstar Global Markets Large-Mid Index.</span></p> <p>&nbsp;</p> <p><strong>Nasdaq-100 ESG Index</strong></p> <p><span style="font-weight: 400;">The Nasdaq-100 ESG Index is an ESG screened version of the Nasdaq-100, which is a basket of 100 of the largest companies traded on the Nasdaq stock exchange. In order to turn the Nasdaq-100 Index into the Nasdaq-100 ESG Index, the financial organization says it looks at 15 potentially problematic areas of business and excludes them from the ESG index.</span></p> <p><span style="font-weight: 400;">But Nasdaq also admits that most of the companies in the Nasdaq-100 parent index take ESG seriously. So only 6% of companies in the original index get filtered out to create the Nasdaq-100 ESG Index.</span></p> <p>&nbsp;</p> <p style="text-align: center;"><strong>∙ ∙ ∙</strong></p> <p><em><span style="font-weight: 400;">The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member </span></em><a href="http://finra.org/"><em><span style="font-weight: 400;">FINRA</span></em></a><em><span style="font-weight: 400;"> </span></em><a href="https://www.sipc.org/"><em><span style="font-weight: 400;">SIPC</span></em></a><em><span style="font-weight: 400;">.&nbsp;</span></em></p>
ESG
Investing
ESG Index: What Is It and What Are Some Examples?

An ESG index can help you track the performance of certain ESG-vetted companies over time.

Fennel
22 Feb, 2023
5 min read
<p class="p1"><a href="https://fennel.com/blog/proxy-season-2023-is-coming-up-heres-what-you-need-to-know" target="_blank" rel="noopener">Proxy season 2023</a> is coming up, which means investors are getting ready to exercise their rights as shareholders and vote on important business decisions. But before the annual general meetings of 2023 really kick off, let&rsquo;s take a look back at last year and pick out some of the trends we saw in proxy season 2022. That way, we might have a better idea of what to expect in 2023.</p> <p class="p1">Here are some of the highlights from last year&rsquo;s proxy season:</p> <p class="p2">&nbsp;</p> <p class="p1"><strong>There was a record number of shareholder proposals in 2022</strong></p> <p class="p1">If your favorite part of proxy season is voting on shareholder proposals, 2022 was your year. Last year broke records in not only the number of shareholder proposals that were submitted to public companies, but also the number of proposals that made it to the ballot and were voted on.</p> <p class="p1">According to <a href="https://corpgov.law.harvard.edu/2022/10/27/boardroom-recap-the-2022-proxy-season/"><span class="s1">a PricewaterhouseCoopers study</span></a>, there were 555 shareholder proposals among Russell 3000 companies that were voted on &mdash; a 25% increase compared to the previous year.</p> <p class="p1">The study says that this is the result of two factors. One, a 17% increase in the number of shareholder proposals that were submitted to these companies. And two, a 40% decrease in no-action requests granted by the SEC (these requests allow companies to drop certain shareholder proposals from their proxy statements).</p> <p class="p1">With this record number of proposals being voted on, a record number of proposals also received the majority of votes.</p> <p class="p2">&nbsp;</p> <p class="p1"><strong>Lots of these proposals centered around ESG issues</strong></p> <p class="p1">In this record year of shareholder proposals, there were plenty that were related to ESG. Proxy Preview Project <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/record-number-of-shareholder-esg-proposals-in-2022-defies-gop-political-backlash-71181308"><span class="s1">found</span></a> 607 instances of shareholder resolutions related to ESG topics in the first half of 2022, which it said was a 22% increase from the year before.</p> <p class="p1">This uptick came despite the fact that a 2020 SEC rule made it relatively harder to file and refile shareholder proposals.</p> <p class="p1">"The attempt to silence shareholder voices has, instead, prompted them to get louder," Andrew Behar, CEO of As You Sow, wrote in <a href="https://www.proxypreview.org/2022/report-blog"><span class="s1">the Proxy Preview report</span></a>. "This uprising is occurring while investors and fiduciaries increasingly understand that systemic risk affects all players in the capital markets, inspiring leading companies onto the path of serving all stakeholders."</p> <p class="p2">&nbsp;</p> <p class="p1"><strong>Some of the top ESG issues were: DEI, climate change, and political spending</strong></p> <p class="p1">While governance issues remained a popular topic for shareholder proposals, there number of shareholder proposals surrounding environmental and social issues almost doubled among Russell 3000 companies, according to the PwC study mentioned before.</p> <p class="p1">However, the study points out that only 41 of the 288 E and S related proposals received the majority of votes. This is a slight uptick from the 36 proposals that got the majority of votes in 2021, but still represents a decline in the percentage of proposals reaching the majority benchmark.</p> <p class="p1">The study found that the number of environment-related proposals doubled compared to the year before. These proposals included topics like measuring direct emissions, climate risk management, measuring indirect emissions, and implementing sustainable packaging. Proposals that dealt with direct emissions like greenhouse gas emissions and net-zero targets were more likely to pass (7 out of 14 did) than proposals that dealt with indirect emissions</p> <p class="p1">The study also found that shareholder proposals asking for racial equity audits were surprisingly popular, with average support going from 33% in 2021 to 45% in 2022. 8 out of 22 of these proposals passed with the majority of votes.</p> <p class="p1">These environmental and social trends build off of what we&rsquo;ve seen in the past few years. US SIF <a href="https://www.ussif.org//Files/Trends/2022/Trends%25202022%2520Executive%2520Summary.pdf"><span class="s1">analyzed</span></a> shareholder proposals spanning 2020 to 2022 and found that the issues that prompted the most proposals were: labor and equal employment opportunity (with 311 proposals), corporate political activity (with 288 proposals), and climate change (with 265 proposals).</p> <p class="p2">&nbsp;</p> <p class="p1"><strong>Notable vote: Jack in the Box&rsquo;s sustainable packaging</strong></p> <p class="p1">Speaking of breaking records, one especially notable vote came from the shareholders of Jack in the Box. Investor Green Century Funds put together a shareholder proposal asking Jack in the Box to speed up its sustainable packaging efforts, arguing that the company had fallen behind the sustainable packaging initiatives of other fast food companies.</p> <p class="p1">What makes this vote notable is that it passed with 95% of the vote <em>despite</em> Jack in the Box recommending that shareholders vote against it. This is <a href="https://www.greencentury.com/majority-of-jack-in-the-box-shareholders-support-green-century-packaging-proposal/"><span class="s1">the largest margin</span></a> that an environmental- or social-related proposal has passed with a company opposing it &mdash; showing that certain investors really care about environmental impact, and are willing to push companies that drag their feet on these issues.</p> <p class="p2">&nbsp;</p> <p class="p1"><strong>Investors paying close attention to governance</strong></p> <p class="p1">Environmental and social issues were in the spotlight, but so was governance. According to <a href="https://www.ey.com/en_us/board-matters/four-key-takeaways-from-the-2022-proxy-season#accordion-content-1941053843-0"><span class="s1">EY</span></a>, shareholders asked for more board oversight and disclosures when it came to ESG issues, and some companies responded by citing ESG in director qualifications.</p> <p class="p1">EY also notes that despite the signals that activist investors would challenge more company-picked board nominations, the opposition only went up by a small percentage. The average vote <em>against</em> S&amp;P 500 directors was 4.2% in 2022, which was only up a little bit compared to the 3.9% average in 2021.</p> <p class="p2">&nbsp;</p> <p class="p1"><strong>Say on pay decline</strong></p> <p class="p1">One particularly interesting trend in governance is the decrease in support for company &ldquo;say on pay&rdquo; votes. If you look at previous proxy years, you&rsquo;ll notice that in general, say on pay votes received overwhelming support. But that may be starting to chip away.</p> <p class="p1">According to PwC, &ldquo;Average support at companies in the S&amp;P 500 and Russell 3000 hit record lows since the vote was introduced 11 years ago, at 87% and 90% respectively. In the S&amp;P 500, 21 companies failed their say-on-pay vote, with 207 companies receiving below 70% support. The number of failed votes at Russell 3000 companies hit 71.&rdquo;</p> <p class="p1">While 70% may still seem like a high percentage of the vote, this represents a stark contrast when compared to before.</p> <p class="p1">This trend is exemplified by the controversy surrounding Apple&rsquo;s 2022 say on pay vote for its CEO Tim Cook. Last year, Institutional Shareholder Services (ISS), one of the largest proxy advisory firms, <a href="https://www.reuters.com/technology/apple-shareholder-iss-urges-vote-against-ceo-cooks-bonus-2022-02-16/"><span class="s1">asked Apple investors to vote against</span></a> Tim Cook&rsquo;s compensation, saying there were issues with how his equity was awarded.</p> <p class="p1">Apple&rsquo;s say on pay vote still received a majority with 64% approval, but this was down from 95% in 2021. In response, Cook <a href="https://www.cnbc.com/2023/01/12/apple-ceo-tim-cook-receives-a-40percent-pay-cut-after-shareholder-vote.html"><span class="s1">voluntarily cut his own salary by 40%</span></a> at the start of 2023.</p> <p class="p1">This is potentially a big deal, because if Tim Cook isn&rsquo;t safe from say on pay opposition &mdash; the same Tim Cook that leads the largest US company by market cap, that grew his company&rsquo;s share price by around 1,000% since becoming CEO in 2011 &mdash; this could have big implications for the compensation of other CEOs if their shareholders believe they are being unfairly paid.</p> <p class="p1">It could be interesting to see how support for say on pay changes in 2023, or if it changes at all. But all of these trends from 2022 could be worth keeping an eye on in 2023. These trends could just be symptoms of what investors are thinking about during a specific year, or they could be hinting at a larger movement.</p> <p class="p2">&nbsp;</p> <p class="p3" style="text-align: center;"><strong>&bull; &bull; &bull;</strong></p> <p class="p4"><em>The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member</em><a href="http://finra.org/"><em> </em><span class="s2"><em>FINRA</em></span></a><a href="https://www.sipc.org/"><em> </em><span class="s2"><em>SIPC</em></span></a><em>. </em></p> <p class="p5">&nbsp;</p>
Shareholder Activism
ESG
Investing
Highlights From Proxy Season 2022

Let's take a look back at some of the things that happened during last year's AGM season.

Fennel
21 Mar, 2023
5 min read

Take back the power of your investment