investing

A New Type of Investing? Or Is It?

Wby Sam Dreibelbis, CPA | Associate Wealth Advisor – Covenant When researching stocks, every investor should use several criteria. Typically, items ESG investing may be thought of as a fad for milsuch as sales, earnings, debt, and market value are some of the key drivers to determinlennials, environmentalists, etc., but the industry may ing whether that stock is worth an investment. But, what about other factors such as be moving in that direction and the recent data sugthe Environment, Social issues, and Governance? It’s called ESG investing. While gests that it may be wise to diversify in this direction ESG factors don’t necessarily affect the bottom line directly, more investors are using and get on board. The reason ESG is considered to be these types of criteria in their research before they commit to investing in a company. a fad is because most observers think ESG investing Should you? is new. But, it’s not. ESG has actually been around What is ESG investing? ESG is an investment-related decision-making process that accounts for some type of environmental, social, or governance consideration. Some investors use this method to invest in companies that fit within the ESG framework. ESG focused investors often think a performance advantage can be garnered from this. “Putting money where your values are.” Below are a few questions to consider when looking at companies through an ESG lens. Environmental: Does the company have specific policies around how they impact the environment and goals to improve this over time? Do they even measure their impact? Social: How does the company promote health, safety, and fairness in the workplace? Do they address the needs of their employees and have high retention of employees? Governance: If you’ve heard someone talk about ESG, it may put pictures of environmentalists and activists in your mind and not people looking to grow their assets for the long-term. But, there’s more most investors need to learn about this type of investing. In fact, COVID-19 in 2020 taught investors to look at the “G”, governance. since the 1970s. Two Methodist ministers started Pax World to avoid investing church dollars in companies that supported the Vietnam war. However, the actual term “ESG” was coined in 2004. ESG investing has grown to more than $30 trillion dollars as of 2018 and is expected to reach $50 trillion over the next two decades according to CNBC. Three of the companies that most would recognize that are implementing ESG characteristics are Nike, Accenture, and Intuit (the maker of Turbo Tax and Quicken). Some question the performance of an ESG strategy, thinking it would be sub-par. That hasn’t been the case. In fact, many ESG specific strategies have outperformed other non-ESG strategies and investors can still build a very diversified portfolio using stocks that meet the ESG characteristics.

How does company management align with the interest of other stakeholders (employWays To Invest In An ESG Focused Portfolio ees, customers, shareholders etc.)? Are they giving back to society, charities, etc.? That’s There are plenty of mutual funds and exchange governance, and it’s taken center stage. traded funds that focus on ESG. But, investors need

to focus on their goals. For example, if the goal is to own no company that profits from fossil fuels, then this would be an exclusionary method that may cost some near-term and possibly long-term performance, but if it helps make an investor feel more comfortable, it may be a good option. If the goal is to maximize returns, the thought may be to include or overweight companies that have positive characteristics that are drivers for company success over time. For example, if a management team whose compensation is tied to long-term company success as opposed to short-term stock prices, it may be wise to incorporate that company into a portfolio.

Just like most portfolios and investment decisions, it may be wise to elicit the help of an advisor or investment professional to articulate the reasons for a desire to invest this way in order to carefully identify specific strategies. Covenant has had specific ESG strategies since 2018.

ESG investing may not be a new phenomenon, but it is growing and some companies and investment providers are responding faster to it than others. It’s already happening and will only continue to grow. It allows investors a way to feel as though they’re having an impact in the world, while still potentially capturing long-term positive returns.

Like all investing, it’s important to have a plan and stick to it to increase the odds of long-term success. BBM

Sam Dreibelbis, CPA is an associate wealth advisor at Covenant. Sam graduated with Bachelor of Science degrees in Finance and Accounting as well as a Master of Science degree in Accounting from Penn State University. Sam is also a Certified Public Accountant (CPA) and a member of the American Institute of CPAs. THE MOST IMPORTANT

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