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Member FDIC By Andrea McKinney There’s a shift toward ESG-focused strategies when it comes to investing In today’s economy, cultural and er earnings volatility from stocks with high socio-economic issues have given ESG scores. Overall, 90 percent of the results the consumer and individual invesshowed that sustainability initiatives had a tor a voice in corporate boardrooms. neutral or positive effect on investment reLarge mutual fund managers and pension funds turns. are taking their clients’ environmental, social The fixed income side of ESG investing is and governance (ESG) concerns and demandalso gaining momentum. Social and green ing implementation of better corporate practicbonds pay fixed interest like traditional bonds es. In the modern world, well-run companies and go toward funding environmental projects that manage ESG risks have a better chance at and social impact themes. In 2016, inflows securing financing to fund future growth. into social bonds totaled $2.4 billion. In 2018,

ESG encompasses factors such as how a however, social bonds took in $13.4 billion; a company manages its carbon emissions, uses tremendous increase in just three years. Yearof renewable energy, fair trade ingredient to-date through August, social and green bonds sourcing, workforce development and labor have attracted about $8.4 billion, with only 6 standards, equal pay initiatives and anticorpercent coming from the United States. ruption practices, to name a few. The E, S Impact bonds, on the other hand, are smalland G are referred to as “sustainability” inier in scope and are issued by nonprofits and tiatives and help tell the story of how a comfoundations with the investor’s return being pany will remain competitive in the future. commensurate with the profitability of the

For investors, ESG risk analysis serves as a underlying project. framework and overlay to traditional security In Europe, public companies with over 500 analysis that dives much deeper into a comemployees are required to report on ESG factors. pany’s operations. These risks may be hard to Out of 95 stock exchanges worldwide, 86 are quantify because they do not typically show up members of the Sustainable Stock Exchanges, on financial statements. Companies that fail to which had just six member exchanges in 2012. mitigate ESG risks could experience a lasting Seven of these stock exchanges now require and meaningful impact on their bottom lines member companies to report ESG factors. and fail to attract capital from the new investors. The United States is somewhat behind the

A seismic shift toward ESG-focused strategies curve when it comes to ESG reporting. The is underway. At the beginning of 2018, it was NASDAQ issued limited guidance on ESG estimated that $12 trillion of managed assets in reporting in 2017. This guidance was revised the U.S. had implemented ESG screens. This just this past May to fit a greater audience of figure is up $4 trillion from 2016 and $8 trillion member companies. While a little late to the from 2012 (US SIF). Mutual fund companies scene, a strong push by investors will likely have seen record inflows over the last three continue to propel the ESG movement foryears into ESG strategies. In 2018, the numward in the U.S. in the years ahead. ber of available ESG-focused mutual funds and The expectation is not necessarily for ESG ETFs jumped by nearly 50 percent. portfolios to outperform non-ESG portfolios;

A large study on over 2,000 ESG portfolibut rather for investors to match their peros showed that returns are comparable with sonal values with competitive returns while non-ESG focused portfolios. The study furcreating a better world in which to retire. ther found that 88 percent of companies Andrea McKinney is vice president and wealth with sustainability practices had better opmanagement advisor at Central Trust Company. erational performance and cash flow. Out of the eleven GICS sectors, nine showed low