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What's ESG and Why Is It Suddenly So Popular?

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Why the Once-Obscure Way to Invest Is Now Hot “Focus on stocks that have the greatest return” has long been the motto of most investors and, similarly, high returns have been the barometer for considering what made a corporation “successful.” This mentality— the crux of profit-maximization, or “shareholder-first” thinking—was a sea change from a previous school of thought that viewed corporations as a “public trust” responsible for their impact on the world. It was made popular by influential economists like Milton Friedman, who famously wrote, “There is one and only one social responsibility of business—to...engage in activities designed to increase its profits.” But: Friedman wrote that in 1970. Nearly 50 years later, this perspective on corporate responsibility is showing its age. In recent years, the actions a corporation takes to maximize profit have become more difficult to separate from the social issues they directly influence—including global warming, pay and gender equity and human rights—down to a company’s impact on its surrounding local community. These factors, called ESG, or environmental, social and corporate governance, are benchmarks increasingly considered by investors of all stripes to assess a company’s purpose—including how it operates and manages itself, and is used as a litmus test for long-term strategy and stability. Here, we take a look at ESG as a factor for investing and shareholder advocacy, and what its future looks like among a segment of young, socially conscious investors. What’s ESG criteria again? Broadly, it can be broken down like this: Environmental: How is the company protecting or harming the natural environment and complying with government regulations? How does it address environmental risks or handle pollution—from carbon emissions to toxic waste—that may occur as a result of its business? How does it treat land and wildlife? Social: How does the company invest in its “human capital,” or in the well-being, safety, and health of its employees? How does it interact with its community, both on a small-scale and global level? Does its supply chain—including the factories, plants, and vendors—it uses to make its products—operate with the same ethics that the company touts? What about product liability—are the products it makes safe or does it pose an undue risk of harm to consumers? How does it handle opposition from stakeholders (say, a diamond company sourcing ethically questionable minerals)? Corporate governance: Corporate governance looks to a company’s shareholder voting policies, executive pay, accounting practices, the gender and racial diversity of a company’s board— as well as executives’ handling of reported misconduct or discrimination—to ensure it's operating fairly. Are directors entrenched and insulated from stakeholder input? Is the company diverse? What’s its pay structure? How many women sit on its board? Are shareholders included or listened to in making decisions affecting who’s on a company’s board or how much a CEO is paid? Where would you find a company's ESG information? With ESG standards becoming more of an investor ask, companies are increasingly making this information more readily available. Exploring the “investor relations” page on a company’s website may give you access to sustainability reports or its corporate governance pillars. Ahem: The lack of this information on the website may also be equally telling. Additionally, organizations like JUST Capital —which ranks the nation’s most “just” companies —provide helpful ESG criteria and data for corporations, including a “Just 100” list published with Forbes. If you’re considering ESG factors before you invest in a company or fund, contact your financial advisor or brokerage, which should be able to get you that information. What else should you know about ESG investing? If you’re the type of person who likes to know where her food comes from and the broad principles and philosophies of the companies who make your clothes, car, or shoes, then investing in ESG funds or engaging companies you invest in on ESG issues might be a natural next step. While the concept of socially conscious investing is ancient—there are even Biblical references to it —the modern-day idea surrounding it and the ESG framework took root in the 1960s, when investors started excluding “sin stocks,” like tobacco and gun companies, from their portfolios. The movement grew from there, exploding in recent years as social shifts have affected the markets and investing via an ESG lens has become easier to do online and via robo-adviser apps. The Trump Bump: Some think ESG’s boom is a response to the election of Donald Trump, who has rolled back environmental protections and vowed to withdraw the U.S. from the Paris Accord. Thanks to the “Trump Bump,” ESG mutual funds and ETFs (exchange-traded funds) began growing at three times their usual rate a month after the election, increasing from $95 billion to $118 billion under management in a year. Similarly, the total number of U.S assets under management using ESG strategies grew to $12 trillion in 2018. That’s up more than 30% from $8.7 trillion in 2016. That $12 trillion makes up a considerable 1 in 4 dollars of the $46.6 trillion in total assets under management in the U.S. How has ESG influenced shareholder voting and advocacy? In 2018, about half of shareholder proposals to U.S. companies focused on environmental and social principles, according to the Institutional Shareholder Services Voting Analytics database. Shareholder concern surrounding ESG principles has led to results: Last year, almost half of all environmental and social shareholder proposals resulted in companies taking action. For example, last January, the California State Teacher’s Retirement System, a long-term Apple shareholder, wrote a letter asking Apple to study screen behavior in children. Partially as a result, the company launched its weekly Screen Time function (which you now groggily look at on your phone Sunday mornings—yep, you spent that much time on Instagram), as well as other tools for parents. You’ve seen the acronym. Now decide how to apply it to your finances. A set of guidelines once used by companies to manage themselves, ESG has now become a major part of a greater cultural conversation and a way to invest. As ESG investing becomes a mainstream offering via robo-advisers, socially minded index funds and ETFs, understanding the ESG framework and knowing how to find out how much—or little—a company uses it can help you create a portfolio that speaks to your financial goals and your real-world values. --Anna Davies

Why the Once-Obscure Way to Invest Is Now Hot “Focus on stocks that have the greatest return” has long been the motto of most investors and, similarly, high returns have been the barometer for considering what made a corporation “successful.” This mentality— the crux of profit-maximization, or “shareholder-first” thinking—was a sea change from a previous school of thought that viewed corporations as a “public trust” responsible for their impact on the world. It was made popular by influential economists like Milton Friedman, who famously wrote, “There is one and only one social responsibility of business—to...engage in activities designed to increase its profits.” But: Friedman wrote that in 1970. Nearly 50 years later, this perspective on corporate responsibility is showing its age. In recent years, the actions a corporation takes to maximize profit have become more difficult to separate from the social issues they directly influence—including global warming, pay and gender equity and human rights—down to a company’s impact on its surrounding local community. These factors, called ESG, or environmental, social and corporate governance, are benchmarks increasingly considered by investors of all stripes to assess a company’s purpose—including how it operates and manages itself, and is used as a litmus test for long-term strategy and stability. Here, we take a look at ESG as a factor for investing and shareholder advocacy, and what its future looks like among a segment of young, socially conscious investors. What’s ESG criteria again? Broadly, it can be broken down like this: Environmental: How is the company protecting or harming the natural environment and complying with government regulations? How does it address environmental risks or handle pollution—from carbon emissions to toxic waste—that may occur as a result of its business? How does it treat land and wildlife? Social: How does the company invest in its “human capital,” or in the well-being, safety, and health of its employees? How does it interact with its community, both on a small-scale and global level? Does its supply chain—including the factories, plants, and vendors—it uses to make its products—operate with the same ethics that the company touts? What about product liability—are the products it makes safe or does it pose an undue risk of harm to consumers? How does it handle opposition from stakeholders (say, a diamond company sourcing ethically questionable minerals)? Corporate governance: Corporate governance looks to a company’s shareholder voting policies, executive pay, accounting practices, the gender and racial diversity of a company’s board— as well as executives’ handling of reported misconduct or discrimination—to ensure it's operating fairly. Are directors entrenched and insulated from stakeholder input? Is the company diverse? What’s its pay structure? How many women sit on its board? Are shareholders included or listened to in making decisions affecting who’s on a company’s board or how much a CEO is paid? Where would you find a company's ESG information? With ESG standards becoming more of an investor ask, companies are increasingly making this information more readily available. Exploring the “investor relations” page on a company’s website may give you access to sustainability reports or its corporate governance pillars. Ahem: The lack of this information on the website may also be equally telling. Additionally, organizations like JUST Capital —which ranks the nation’s most “just” companies —provide helpful ESG criteria and data for corporations, including a “Just 100” list published with Forbes. If you’re considering ESG factors before you invest in a company or fund, contact your financial advisor or brokerage, which should be able to get you that information. What else should you know about ESG investing? If you’re the type of person who likes to know where her food comes from and the broad principles and philosophies of the companies who make your clothes, car, or shoes, then investing in ESG funds or engaging companies you invest in on ESG issues might be a natural next step. While the concept of socially conscious investing is ancient—there are even Biblical references to it —the modern-day idea surrounding it and the ESG framework took root in the 1960s, when investors started excluding “sin stocks,” like tobacco and gun companies, from their portfolios. The movement grew from there, exploding in recent years as social shifts have affected the markets and investing via an ESG lens has become easier to do online and via robo-adviser apps. The Trump Bump: Some think ESG’s boom is a response to the election of Donald Trump, who has rolled back environmental protections and vowed to withdraw the U.S. from the Paris Accord. Thanks to the “Trump Bump,” ESG mutual funds and ETFs (exchange-traded funds) began growing at three times their usual rate a month after the election, increasing from $95 billion to $118 billion under management in a year. Similarly, the total number of U.S assets under management using ESG strategies grew to $12 trillion in 2018. That’s up more than 30% from $8.7 trillion in 2016. That $12 trillion makes up a considerable 1 in 4 dollars of the $46.6 trillion in total assets under management in the U.S. How has ESG influenced shareholder voting and advocacy? In 2018, about half of shareholder proposals to U.S. companies focused on environmental and social principles, according to the Institutional Shareholder Services Voting Analytics database. Shareholder concern surrounding ESG principles has led to results: Last year, almost half of all environmental and social shareholder proposals resulted in companies taking action. For example, last January, the California State Teacher’s Retirement System, a long-term Apple shareholder, wrote a letter asking Apple to study screen behavior in children. Partially as a result, the company launched its weekly Screen Time function (which you now groggily look at on your phone Sunday mornings—yep, you spent that much time on Instagram), as well as other tools for parents. You’ve seen the acronym. Now decide how to apply it to

your finances. A set of guidelines once used by companies to manage themselves, ESG has now become a major part of a greater cultural conversation and a way to invest. As ESG investing becomes a mainstream offering via robo-advisers, socially minded index funds and ETFs, understanding the ESG framework and knowing how to find out how much—or little—a company uses it can help you create a portfolio that speaks to your financial goals and your real-world values. --Anna Davies