Value-Based Investing: SRI and ESG

May 21, 2020

“Every dollar you spend, or don’t spend, is a vote you cast for the world you want.”
̶ L.N. Smith.

That truth certainly holds, but here at Bartholomew & Company, we may edit that slightly to also include “where you invest your dollars”.

Investors desire to have their money grow – that is the fundamental point of investing, of course! However, there has been a flourishing desire to balance asset growth with belief principles. Over time, there have been more (and increasingly better) ways to accommodate values and incorporate them into investment decisions. Value-based investing is a multi-faceted investment philosophy that allows investors to align their personal beliefs, or simply their general desire to help make the world a better place, with their investment dollars.

There are two main terms in value-based investing that are sometimes used interchangeably but are in fact quite different: SRI (socially-responsible investing) and ESG (environmental, social, and governance investing). SRI investing was the traditional way to approach this attitude of investing through “negative screening” or more simply: full exclusion of certain investments. A very common example of this is portfolios that exclude investments in companies that gain a significant amount of revenue through sales of alcohol, tobacco, and firearms. SRI investing can align with any number of value principles an individual or organization may have – all you need to focus on is removing certain investments, industries, and companies from the portfolio. In turn, you are now investing more dollars in companies that align to the standards of your defined principles.

ESG investing is quite a bit more layered than simply excluding certain investments. The E, S, and G are three siloed buckets that have a number of factors within them:

  1. Environmental factors such as issues of climate change and natural resources;

  2. Social factors including labor conditions, human rights, and community outreach; and

  3. Governance factors such as Board of Director composition, management quality, and corporate structure.

From there, these and many more categories can be delineated down to even more granular metrics to measure companies to determine if they are suitable for investment. This strategy attempts to balance traditional financial metrics with a holistic ESG overlay.

You may be asking yourself, “Well, wouldn’t ESG and SRI approaches lead us to basically the same place?” Not necessarily. For example, an SRI mandate of excluding carbon-emitting companies would always fully exclude companies that have a negative environmental impact. Let us then say that this fictional carbon-emitting company has a diverse Board of Directors, an excellent track-record of community engagement, and just instituted a “green” project specifically introduced to have a more sustainable emissions process. Maintaining the exclusionary process of SRI would leave out this company regardless of these other more positive factors. An ESG-focus, on the other hand, might find the company to have enough positive factors to consider it as a potential investment. From there, if the ESG managers do become shareholders, they can use proxy voting to push for implementation of more change to align that company with other key ESG metrics. In this example, the ESG shareholders might push for the organization to fund more “green” projects, for instance.

ESG encapsulates a holistically responsible view of investments while SRI takes a hard stance for particular values that matter to the investor. Both philosophies can be justified and used to help investors guide their dollars to securities that are right for them.*

At Bartholomew & Company, we work with each client individually to ensure we understand your unique and multi-faceted investment goals. If those goals include some form of value-based investing, our team is here and happy to help. If you would like more general information, please visit the United Nation Principles of Responsible Investing webpage or call our office at 508-753-8807.

Kathleen Glowacki
Sr. Financial Analyst, Investment Management

508-753-8807 | 800-440-8807

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. *Investing in the stock market involves gains and losses and may not be suitable for all investors. The investment’s socially responsible focus may limit the investment options available to the investment and may result in returns lower than those from investments not subject to such investment considerations.