People have historically used investments to create a better future for themselves and their families. With ESG investing, they can help make the world a better place as well. ESG investing involves allocating capital to companies that avoid exposure that is inconsistent with the values underpinning socially responsible investing or, rather, emphasize impactful exposure to companies promoting clean technology or societal betterment.
The “E” within ESG incorporates environmental issues into the investment decision-making process by scrutinizing corporate practices primarily associated with climate, carbon, and water. The “S” within ESG reviews companies’ level of seriousness in addressing social issues, such as diversity, employee treatment, and consumer welfare. Although the “G” in ESG is overlooked by some, investor attentiveness to corporate governance is highly encouraged as it often sheds light on the willingness and ability of a given company to enact substantive change for the better.
At Cobblestone, we fundamentally believe an ESG portfolio strategy and an ESG-indifferent portfolio strategy need to provide substantially similar risk and return outcomes. Said differently, we do not believe ESG mandates should involve sacrificing returns, nor should they carry expectations of above-market results. It is important to maintain the foundational building blocks of prudent asset allocation and resist the urge to introduce unintended risks associated with overly simplifying the portfolio construction process in pursuit of a high absolute ESG underlying quality.
We see dual roles for raw company data and third-party analytical providers in determining the quality of companies’ material and non-financial ESG metrics. To build the right portfolio for clients, we seek open-end mutual funds and exchange-traded funds that stand out for specific underlying criteria within one or more ESG pillars. We also differentiate between funds with intentional ESG incorporation versus those with incidental and likely fleeting ESG considerations. Instead of simply targeting companies with high absolute ESG characteristics with little to no growth in ESG efficacy, we feel more value can be extracted by targeting companies with an improving ESG profile. If you’re wondering about the types of ESG characteristics we look for, we’ve provided a complete table at the end of this article.
As always at Cobblestone, our hybrid investment model blends the best of active and passive styles in ESG investing. Passive positions create the core of the aggregate portfolio strategy. They mitigate relative risk, provide low-cost access to key market segments, and contribute to superior ESG portfolio quality. Active positions serve as satellite exposures of the aggregate portfolio strategy. They principally seek outperformance while also contributing to superior ESG portfolio quality. We display a bias toward active managers with pervasive and long-standing ESG considerations across their strategy offerings. Of course, expense control is an important part of every investment plan we build.
If you’re interested in learning more about using investments to make an impact that goes beyond your own returns and building a portfolio that also helps build a better world, we’d be happy to start the ESG investing conversation with you.
| Environmental Issues |
Social Issues |
Governance Issues |
Climate– Climate Change Energy– GHG Emission Water– Water Intensity |
Diversity– Minority Employment Society– Community Spending Employees– Turnover Rate |
Board– CEO Duality Gender & Equity– Female Leadership Compensation– Executive Clawback Provisions |
(This is not necessarily an exhaustive list of ESG criteria we look for. Nevertheless, it covers a predominant slice of what matters to us.)
CCA’s ESG security selection is typically limited to select Exchange Traded Funds (ETFs) and mutual funds that are managed by unaffiliated third parties. As such, CCA has no control over the selection of investments within those ETFs and mutual funds. While CCA will conduct due diligence on each ETF’s and mutual fund’s overall investment mandate and philosophy, CCA cannot guarantee that each security held within the ETF or mutual fund structure will align with the specific ESG objectives and restrictions expressed by its clients.