Beyond the Label, ESG Funds May Miss Their Mark
KEY TAKEAWAYS
Components of ESG in an investment strategy, how they’re measured, and the method of incorporation can lead to a wide range of investment outcomes.
ESG strategies exhibit a broad spectrum of characteristics, which may drive expected returns that differ from the market.
Greenhouse gas emissions exposure has varied substantially across ESG strategies, highlighting the importance of looking beyond ESG labels to determine whether an ESG investment is consistent with one’s goals.
The absence of a universally accepted definition of environmental, social, and governance (ESG) investing has resulted in a broad array of approaches.1 This presents a potential dilemma for investors, as the components of ESG considered in an investment strategy, variables by which they are measured, and the method of incorporation can lead to a wide range of investment outcomes. Our study of US-domiciled ESG-focused funds highlights a variety of both fund characteristics and sustainability profiles, a reminder that investors may need to look beyond ESG branding to evaluate whether an investment approach is consistent with their goals.
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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) with its primary place of business in the state of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. References to registration with the SEC do not imply any endorsement or approval of the qualifications of the firm, nor do they imply that the firm’s representatives have attained a particular level of skill or training. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
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