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EP Wealth’s Carrie Sax, CFA, CFP® shares insights on ESG investing, explaining how it adds a layer of due diligence while helping clients align investments with their values.
Aligning Wealth Management with ESG Values
From my perspective as a CFA® Charterholder and Certified Financial Planner®, Environmental, Social, and Governance (ESG) strategies not only allow investors to make socially conscious choices but also add an extra layer of due diligence to the portfolio selection process. Standard stock picking analysis typically focuses on a company's financial strength and growth potential; ESG analysis takes it a step further by considering additional criteria such as checks and balances within the company, operational controls, and policies that align with environmental and social responsibility.
The result is that ESG investing aims to identify high-quality companies that not only exhibit revenue growth and high profit margins, but also strong governance and responsible business practices. While the internal expense ratios can be a bit higher for ESG mutual funds and exchange traded funds (ETFs), ESG portfolios tend to offer lower declines during down markets. However, it's important to recognize that there is no guarantee that ESG portfolios will always follow this pattern, as market conditions and company performance may vary.
What Does ESG Analysis Involve?
ESG analysis involves asking questions about how a company operates, such as:
- Are there good operational controls?
- Does the company have a history of checks and balances on the CEO and board of directors?
- Does the board of directors represent the customers of this company and the consumers of their products?
- Are there diverse voices and perspectives on the board of directors?
The answers to these questions can help paint a clearer picture of how a company is run. It’s about assessing whether a company has effective leadership structures and ethical corporate conduct, which could potentially be indicators of long-term financial health.
A Real-World Example: The BP Oil Spill
The example I like to use when talking about how ESG analysis can benefit investors is the BP oil spill in the Gulf of Mexico in 2010. BP had a poor track record on ESG factors even before the disaster. They had ongoing issues with employee safety protocols and operational oversights, making them a risky investment from an ESG perspective. If you had owned an ESG portfolio at that time, you likely would not have had BP in it—and you would have avoided the financial fallout from the spill.
ESG Investing: A Fad or a Smart Strategy?
There are a lot of opinions out there about ESG investing. Some people think it’s just a passing trend, while others are concerned about “greenwashing,” which is when companies exaggerate or misrepresent their environmental and social initiatives to appear more responsible than they really are. Others tout the advantages of ESG investing and claim that it can offer more stability than some standard portfolios.
As a financial advisor, my role is to help my clients cut through the noise and look at the hard data. While past performance is never a guarantee of future results, some research indicates that ESG portfolios have, at times, exhibited slightly less risk compared to standard portfolios. While they may not always capture the full upside during strong bull markets, they have also, in some cases, provided a little more downside protection during periods of market volatility.
At EP Wealth, we have robust software that allows us to show clients their portfolio performance since inception, over any selected time period, and compare it to traditional benchmarks like the Russell 3000 or MSCI indices. This data helps us determine if ESG investing is truly delivering value to our clients.
Partnering with Respected ESG Investment Managers
At EP Wealth, our ESG strategy involves including the mutual funds and exchange-traded funds (ETFs) of investment management companies that have a respected track record in ESG investing.
For example, we incorporate funds from Calvert, one of the longest-standing ESG investment firms. Calvert does more than just screen companies for ESG criteria—they actively engage in shareholder activism, working with companies to suggest ESG-friendly practices and issuing transparent reports on their progress. Calvert's commitment to responsible investing makes them an important part of our ESG strategy.
How I Help Clients Decide If ESG Investing is Right for Them
Choosing an ESG portfolio isn’t just about ethics—it’s about aligning investments with a client’s overall financial strategy. When I work with clients, we take their full financial picture into account.
For example, if a client’s financial situation is tight and they’re just on track to afford retirement, they might choose to prioritize cost efficiency over ESG concerns. In that case, we may opt for a lower-cost portfolio.
On the other hand, some clients are willing to accept slightly higher expense ratios because they believe that ESG factors like sustainability contribute to long-term business resilience.
There’s no right or wrong path—it’s all about what makes the most sense for each client’s unique financial situation and goals.
The Future of ESG Investing
The ESG investing landscape continues to evolve, and the industry is working toward establishing more standardized criteria and reporting requirements. As climate-related challenges and social issues become more pressing, ESG frameworks are expected to become even more rigorous.
For investors who are interested in ESG investing, working with a financial advisor can help determine whether it aligns with their long-term financial goals. Whether you’re new to ESG or already investing with sustainability in mind, my role is to provide clarity, data, and strategic guidance to help you make informed investment decisions.
Contact an EP Wealth advisor to learn more about incorporating ESG considerations into your investment approach.
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