Unless you have avoided all investment news the past couple of years, you are likely familiar with the term ESG investing.

Is your organization interested in adding ESG investments to its portfolio? This guide addresses how ESG can be difficult to evaluate and offers tips to help you decide if it is right for your organization.

What is ESG Investing?

(Download a PDF version of this guide)

Environmental, social, and governance (ESG) criteria are a set of standards that socially conscious investors use to screen and evaluate potential investments.

• ‍Environmental - How a company performs as a steward of the environment.‍
• Social - How a company manages its relationships with key stakeholders including employees, customers, suppliers, and the communities they serve.‍
• Governance - Oversight of the company including leadership, board structure, compensation, audits, internal controls, transparency, and shareholder rights.

Experts Disagree About ESG

While most of us would agree that it makes good sense to invest in well-run companies that take into consideration environmental, social, and governance best practices, it becomes more difficult to agree on how to evaluate these companies on the basis of ESG criteria. In fact, researchers from the Massachusetts Institute of Technology (MIT) and the University of Zurich found a huge divergence between the six prominent ESG rating agencies.  Overall, they found that the average correlation across rating providers was only about 46% (a correlation of 100% means complete agreement).  In the extreme case two ranking services had a negative correlation (meaning companies highly ranked by one service were poorly ranked by another).

Tesla vs Royal Dutch Shell

Take Tesla and Royal Dutch Shell as an example. A survey of a large group of average investors might indicate that Tesla should rank highly and Royal Dutch Shell (the world’s fourth-largest oil company) poorly on ESG factors. In fact, when comparing their scores by two of the largest ESG rating agencies, one ranks the two companies the same, just above the halfway mark, and the other ranks Royal Dutch Shell above-average and Tesla below-average. There is significant subjectivity in the determination of what constitutes a good ESG company.

Tips for Adding ESG to Your Portfolio

So what should an organization do if it wants to embrace and encourage good ESG practices? We believe that organizations should consider the following:

Here are 5 ways to drive engagement and create more personalized interactions with your members and donors.

1. Limited Options
   Recognize that the investment universe narrows as you apply ESG screens.
2. Organizational Needs vs. Personal Preference
   Make prudent decisions recognizing that with organizational assets, we must first and foremost put the interests of the organization in front of our individual interests.
3. Balance ESG With Other Portfolio Considerations
   Acknowledge that a group of individuals is unlikely to be able to accommodate everyone’s specific ESG concerns. Strive to agree on a balance between strong overall positive ESG characteristics, costs, and portfolio considerations.
4. Maintain Diversification
   Acknowledge that well-managed companies typically consider all stakeholders (customers, shareholders, employees, community) and embrace strong environmental, social, and governance policies.
5. Successful Companies Are Likely Good Stewards
   Rather than mail form letters, send personal thank you videos that help connect donors to their causes. Video acknowledgments make donors feel appreciated in a very personal way.
6. Look Beyond ESG Scores
   Consider that some companies with poor ESG scores are making significant changes towards improving ESG practices for their industries. These are companies that we may not want to exclude from investment. In fact, we may want to encourage them to continue this path.

Is ESG Investing Right for Your Organization?

Overall, it is reasonable to acknowledge that this is a very complex issue - one that the experts don’t completely agree upon and that your oversight group may also not agree upon. Selecting portfolios that systematically balance strong ESG practices with the fiduciary responsibilities to have well-diversified, low-cost portfolios may be the best approach for many organizations.

Reach out to eCIO for more information or to start a discussion about ESG investment options.

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1. F. Berg, J. Koelbel, and R. Rigobon. Aggregate Confusion: The Divergence of ESG Ratings. MIT Sloan School Working Paper, 5822-19.
2. Mackintosh, James. "Unclear What ESG Is, Investors Want to Buy."Wall Street Journal, March 5, 2021