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