ESG may sound like a scary acronym, but for the average investor, it may come down to more practical issues such as better minority inclusion in the workplace, more efficient use of water, reducing forest fires and pollution, making our streets safer, or lifting the standard of living in communities and neighborhoods.
In a recent story, we highlighted how some financial advisors are incorporating the environmental, social, and governance (ESG) aspects of companies and funds into their clients’ portfolios. But how do these advisors actually select the right funds and investments for clients who want their values reflected in their investments?
One advisor is using a very personalized approach to create investment portfolios that reflect exactly the values that the individual client cares about.
“There’s a lot going on in the world, and I think people want to invest with their values in mind,” said Cullen Fischel, owner and financial planner at Prosperity Financial Design.
Fischel explained that individuals who consult with him about ESG already have a good grasp on the causes they care about, but they don’t know how their investments align with their values. “They want to see in numbers and words how their investments either align or deviate from their values. In other words, they want to measure their impact,” he said.
To help with this need, Fischel has created a process that includes “a real narrowing in on what the clients’ or the investors’ actual values are and how that can be recorded and rated against what companies, mutual funds, or ETFs offer.”
Fischel has partnered with a company called Ethos to create a survey to that end. Ethos rates over 10,000 companies, brands, and funds using 190 metrics across 45 causes that gauge a company or fund’s performance in those areas.
The causes are loosely based on the United Nations Sustainable Development Goals. Examples include equal pay and opportunity, access to affordable healthcare, disease eradication, affordable and safe housing, fair labor practices, ending poverty and hunger, technologic innovation to foster economic growth and human development, humane treatment of animals, peace, and justice, reduced waste, quality education and many more.
Ethos allows “an investor to take all these data sources into mind and create a customized impact assessment that then creates an Impact Persona,” explained Fischel. What it comes down to is that clients take the survey and tell it what issues or causes are closest to their hearts.
“Then, that survey creates a score for how you relate to those different causes,” he said. “And then you get an Impact Persona. It’s a report that shows you in numbers and words exactly where your values lie.”
These results are then overlaid over the investor’s portfolio so that they can see how their individual investments actually rank against their stated preferences. Or, if the investor doesn’t have an investment portfolio yet, Fischel will create one based on this particular Impact Persona report and score.
Fischel uses portfolio analytics software to create a balanced portfolio that will be more aligned with the client’s values. With that in mind, he will dial back in some areas just to make sure he’s not overweighting the portfolio in certain sectors. The goal is to have a balanced portfolio.
“What I find interesting is that when I rank the list of all available mutual funds and ETFs by alignment with a person’s impact assessment, most of the time ESG funds are not at the top of the list,” he said. “Many people just assume that if ESG is in the name of the fund, it must align with their values, but this usually is not true at all.
The reason for this, he said, is that “the typical ESG mutual fund or ETF is built to serve many masters, being each of the three pillars of ESG. Somebody’s values may be more heavily concentrated on issues like sustainable use of water or fair labor practices, which may be issues that certain ESG funds exclude or underweight. In this case, that person may be better off investing in a non-ESG fund that aligns more closely with those specific values.”