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What’s ESG Investing and How Does it Work?

By Sylvia Kwan

How and where we put our money makes a real, tangible difference — that’s why we built Ellevest Impact Portfolios to contain* investments designed to power social and environmental benefits — including advancing women. One of the criteria we used to build them is an approach known as Environmental, Social, and Governance (ESG) investing.

What’s ESG Investing and How Does it Work?

What’s ESG investing?

It’s a framework that investors (or, often, the asset managers who put together ESG-focused ETFs or mutual funds) use when they evaluate an individual investment. It looks at how the company treats the environment (the E), whether they’re good to their employees and the people they do business with (that’s “social,” the S), and how they run the company from a logistics and leadership standpoint (aka “governance,” the G).

First, ESG rating agencies like MSCI ESG, Sustainalytics, and SASB publish their findings about an investment’s business practices. Then, investors or ESG fund managers look at that info alongside the company’s historical financial results to determine whether an investment is worth adding to a portfolio or ESG fund.

Why it matters

Obviously doing the right thing is important, but at its core, ESG isn’t about warm and fuzzies. It’s about the fact that doing good is often what’s good for business. And good for investors. The idea here is that companies who make good ESG decisions tend to be less risky than those who make bad ESG decisions, because the bad actors are more likely to get hit with financial losses related to ESG issues. (See: BP’s oil spill and Volkswagen's emissions scandal and Tesla’s … Elon Musk thing.)

Says who (besides common sense, tbh)? A group of financial institutions who got together at the UN’s invitation in 2014. After taking a hard look at the research, they created industry guidelines for incorporating ESG considerations into decision-making in a paper called “Who Cares, Wins.” (TL;DR: This is a smart move, ethically and financially. The end.)

More and more investors are getting in on it. Today, $11.6 trillion (yes, trillion with a T) worth of investment portfolios incorporate ESG ratings — that’s a 44% increase (!) over the $8.1 trillion reported in 2016. World leaders are even calling ESG incorporation a fiduciary responsibility. That’s a trend we can totally get behind.

Break it down for me.

Environmental

The “E” in “ESG” looks at what the company does (or doesn’t do) to protect the environment. That’s things like energy usage, pollution, resource conservation, the treatment of animals, product packaging, and waste management. Sometimes, depending on the rating agency, it also includes whether existing climate change trends will threaten the company’s future.

As you might expect, getting a good “environmental” grade can be important for a company’s financial outcomes. First of all, the market — investors, buyers, regulators, the media ... basically everyone — might “punish” them for bad practices. Or, if the company’s operations depend on natural resources, they could run themselves right out of business. (That’s one of those times when “we told you so” would be … not fun.)

Social

Next up: S, or social. This has to do with how well the company treats people — you know, employees, customers, partners, their communities, and so on and so forth. It includes the company’s practices on things like human rights, child labor, health and safety for its team, corporate culture, employee engagement, and customer satisfaction.

Good relationships are good business. Happier employees treat customers better and are more productive and less likely to quit, happy customers are more likely to stay customers and refer their friends, and it stands to reason that happy local governments may be more likely to give out things like land permits for expansion.

Governance

The “G” — governance — deals with the way the company runs the business. That’s things like the quality of company and board leadership, board independence, shareholder rights, executive diversity (side eye), executive compensation, data privacy, and good practices around transparency and disclosure.

Here are just a few examples in this category that could threaten a company’s financial performance: sketchy — or illegal — business practices, bad data security (hi, Target and Facebook and Equifax and pretty much everyone else), and a leadership team that isn’t diverse.

How does ESG fit in with Ellevest Impact Portfolios?

Here’s the thing: ESG issues — climate change, unequal pay, and the lack of gender diversity, to name a few examples — all affect women disproportionately. So ESG funds are a big part of our Ellevest Impact Portfolios, because we believe that by investing in companies who follow good ESG practices — and excluding those who don’t — our dollars can help advance women.

And in case you haven’t heard, we’re also all about reducing investment risk. So going back to that whole unethical-companies-are-more-risky thing, incorporating ESG funds was just one of the ways we designed Impact Portfolios to help you reach your financial goals, too.

By investing in ESG funds, we’re helping to advance women around the world while offering our clients the opportunity to earn competitive returns. Any investing portfolio you hold with us can be transferred into an Ellevest Impact Portfolio.** So ... you in?

Disclosures

For people who invest with us online using Ellevest Digital and Premium, up to half of an Impact Portfolio’s holdings (depending on your goal) can be held in impact investments that power social and environmental benefits. With Ellevest Private Wealth, those holdings can comprise your entire portfolio.

Because they require more time and research to maintain, the average fund fee for our Ellevest Impact Portfolios ranges from 0.13% to 0.20%, compared to 0.06% to 0.17% for our core portfolios. Also, transferring your investments from a standard portfolio to an Ellevest Impact Portfolio may cause you to incur capital gains.

© 2018 Ellevest, Inc. All Rights Reserved.

Because they require more time and research to maintain, the average fund fee for our Ellevest Impact Portfolios ranges from 0.13% to 0.20%, compared to 0.06% to 0.17% for our core portfolios. Also, transferring your investments from a standard portfolio to an Ellevest Impact Portfolio may cause you to incur capital gains.

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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Sylvia Kwan

Sylvia is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.