DEAR TRUST OFFICER: What is “ESG investing”?

Last Updated on Apr 1, 2023

DEAR TRUST OFFICER: What is “ESG investing”? Is it a good idea? Can it be used in a trust? — NOVICE INVESTOR

DEAR NOVICE:

Some investors hope to align their investments closely with their social values. Once upon a time, that might have meant not investing in tobacco or liquor companies, but now there is a more complex and nuanced approach: ESG investing. Three categories of factors are involved: environmental, social, and governance (ESG). An environmental focus may look at carbon emissions, water stress, renewable energy, or pollution. Social factors might be diversity, inclusion, labor, employee welfare, or data security. Governance issues might touch upon independent directors, audit standards, women in leadership, and executive compensation.

Companies may be scored for their ESG performance. They may self-report, or data may be gathered by third parties who then sell them it. These scores may be combined with traditional financial analysis tools in determining which companies are likely to have the desired impact while still providing strong returns to shareholders.

However, ESG investing has become somewhat controversial, as some believe that it has become a means to inject political factors into investment decisions, as well as a mechanism for bringing political pressure to bear on company management. ESG factors can serve as a cover for the demands made by institutional investors. This perception of a political agenda hardened when, in the name of “climate change,” ESG proponents argued against any investments in oil and gas companies. Several states have explicitly disavowed ESG investing and removed their pension funds from firms that promote that strategy.

ESG is a fine idea for some investors, perhaps not so much for others. Generalizations are not appropriate, and more information is needed to determine whether ESG factors should be a part of your investment planning. ESG factors may be taken into consideration in managing trust assets, but evaluating financial risk and reward must remain paramount in the fulfillment of fiduciary duties, unless the trust creator or trust beneficiaries stipulate otherwise.

If you would like a professional review of your portfolio strategies, we would be pleased to meet with you at your convenience.

Do you have a question concerning wealth management or trusts? Please contact us at 219-755-6110.

(February 2023)

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