Six Questions on ESG Investing

Joni Clark, President and CEO of 320 Park Analytics LLC, shares her insights about the growing trend toward environmental, social and governance (ESG) investing. Ms. Clark has more than 30 years of securities and investment experience, including the past three with 320 Park Analytics LLC, a wholly owned subsidiary of Mutual of America Life Insurance Company.

Can you give us a brief overview of ESG investing?

ESG (Environmental, Social and Governance) is an umbrella term used to define a range of investment strategies that evaluate a company’s standards for conducting business in three central categories:

  1. Environmental evaluates how a company’s business practices affect natural resources and the climate, including company policies on carbon emissions, energy efficiency, water conservation, waste/recycling and mitigation of hazardous/toxic materials or other forms of pollution.
  2. Social evaluates a broad range of company policies on social issues such as inclusion and diversity in the workplace, labor rights, consumer privacy/data security and product safety.
  3. Governance evaluates how a company manages itself in terms of business ethics and internal controls, board diversity and compensation, and political donations/lobbying.

There are many different terms used to describe investments within the ESG category, including sustainable, socially responsible, green, and impact- and faith-based investment strategies.

Why has there been growing interest in ESG investing?

Investor interest in ESG investing has grown dramatically in recent years because changing social norms and demographics in the U.S. have led to more investors wanting to see their philosophical views represented in their investment portfolios. Millennials, in particular, have driven the growth of ESG investing for much of the last decade, but we are now seeing interest broaden out to the general population. The turbulent events of 2020 further strengthened the rationale as a result of renewed calls for social awareness and a heightened sense of urgency to combat climate change.

How much have asset flows into ESG funds grown?

In 2020, we saw a major shift in how mutual fund investors directed their investment dollars in the U.S. According to Morningstar, ESG fund flows accounted for nearly 25% of overall net flows into stock and bond funds. ESG funds attracted a record $51.1 billion in net flows in 2020, more than twice the previous record of $21.4 billion set in 2019, and nearly four times the previous annual record for net flows set in 2018.

We’re seeing significant money flows into ESG funds because investors are enthusiastic about the concept, and because investors now have more ESG fund choices than ever before. The number of ESG funds available to U.S. investors grew to almost 400 last year (392)—up 30% from 2019 and a nearly fourfold increase over a decade.

What are the primary ESG investing approaches?

There are a variety of different investment philosophies and methods for incorporating ESG criteria into the investment process. Three primary approaches used by investment managers are:
  1. Restrictive screening, through which managers use exclusionary filters to screen out companies or industries that do not meet defined environmental or social standards.
  2. Impact investing, through which managers proactively invest in companies based on specific ESG themes or objectives and use proxy voting and other shareholder engagement strategies to influence company behavior.
  3. ESG integration, through which managers systematically blend ESG analysis with traditional financial analysis in the investment process to develop a more complete picture of the long-term risks and opportunities of the companies in which they invest.

Would you expand on what ESG integration means?

ESG integration is the most common approach to ESG investing. It is widely used by traditional investment managers because of an increased awareness that holding companies to higher standards for corporate responsibility and conscientious business practices may also provide more stable, long-term investment growth.

ESG integration not only aims to align investments with philosophical views, but also to manage investment risks and enhance performance. Investment managers seek to understand material ESG issues that can expose a company to significant regulatory, legal, product or reputational risk, and how they can impact the long-term financial health of companies.

What does ESG investing signify for retirement investing?

Environmental and social issues are likely to influence the investing landscape for the next several decades. Despite the tremendous growth in investor interest and ESG fund options, we have not seen similar growth in 401(k) and other defined contribution retirement plans primarily because of inconsistent guidance from the Department of Labor and regulations governing Employee Retirement Income Security Act (ERISA) plans.

As ESG investments continue to evolve, so will the regulatory framework that governs their inclusion in ERISA plans. The current regulatory and legislative landscape seems to be growing more conducive for ESG investing and may give plan sponsors more support in responding to participant demand for ESG investment options in retirement plan menus.

This material is for informational and educational purposes only and is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. 320 Park Analytics LLC does not provide investment advice. Please consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs.

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