What is ESG and Does It Belong In My Portfolio?

See the full episode notes HERE

In the most recent episode of AWM Insights, Brandon, Erik, and Justin discuss what you need to know. The top story of this episode was President Biden being sworn in along with the first female Vice President, Kamala Harris. President Biden also rejoined the Paris Climate Accord and that will influence clean energy and ESG investing.

Don’t underestimate the value of role models

This is not a part of the podcast but relevant to the news at hand. Self-limiting thinking is one of the most toxic realities affecting every single human mind. The words “people like me, from wherever, don’t accomplish things like that” is the most crippling self-talk you can ever have. If you do not believe something is possible you will likely be stuck within the negative feedback loop and accompanying victim mentality for your entire life. Just seeing someone achieve something for the first time makes it exponentially easier for the next person to accomplish.

My oldest of three daughters is 7 years old.  We were watching the news on inauguration day and she noticed that the Vice President is now a woman. Her reaction was immediate and a Eureka moment for her. She began talking about her future as President of the United States when she is older. I couldn’t have been prouder to see her ambition. She doesn’t know about Janet Yellen yet, but she is another great role model for young women as she is now Treasury Secretary and was previously Chair of the Federal Reserve.

“Every day that we read the news we have the possibility of being confronted with a fact about our world that is wildly different from what we thought we knew.” - Samuel Arbesman, The Half-life of Facts: Why Everything We Know Has an Expiration Date

Our world is constantly changing, and the evidence of what works in long-term investing must always be challenged to capture the returns you deserve. As you can choose where to spend your dollars as a consumer, you can do the same when allocating your money to companies that reflect your values and deliver the impact you want in the world.

What is ESG?

Environmental – this can be anything related to the company’s energy consumption, waste, emissions, and resource conservation.

Social Responsibility – this incorporates diversity and business relationships. How does the company treat its other stakeholders.

Governance – Corporate governance has to do with transparency and accountability in how the company is run and if they do a good job of creating shareholder value at the board of director’s level.

For more detail see this Investopedia article.

Why ESG?  

“wealth is impact, and it isn't just about achieving some financial return for the means of a financial return. And so this starts at the very base level of our client's priorities all the way into how we deploy capital.” – Erik

A great feature of our open architecture is the custom portfolio creation according to your values. Not only is the portfolio unique to you based on the outcomes you desire, but the investments can also be screened according to your beliefs. Whether that is moral, religious, or environmentally conscious the investments are tailored specifically to you, your values, and in alignment with your financial structure. It is the duty of every Wealth Advisor to know their client and ask the right questions at the beginning of the process.

“I think one of the things I like to do when we start to have this conversation is take a step back and zoom out and really ask the why. Why is this even important? And for us at AWM, we've shared this, I think every single time we're on here, that our mission is to help unlock the full potential of our client's wealth for maximum impact first on their families, the community, and the world at large. And so we strive to help our clients gain that clarity on what impact means to them personally. And then ultimately, we distill that down into some clear priorities.”

What is the Trade-off?

In the past, you likely had to sacrifice return in order to allocate to ESG but the evidence is now showing otherwise. This recent analysis shows this.

To allocate to ESG friendly portfolios does not mean you will be over-concentrated and lack proper diversification. The global market of stocks and bonds is massive enough that prudent diversification can still be achieved while still targeting highest expected returns.