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Effective ESG: Align Your Portfolio With Your Values

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Our research into environmental, social, and governance (ESG) investing can help you invest toward both your values and your financial goals.

A 2022 study of high-net-worth investors conducted by The Northern Trust Institute found over half (53%) believe ESG standards are an important factor when making investment decisions, and 43% plan to increase their allocation to ESG investments within the next two years. As wealth increases, so does the percentage of respondents who describe ESG as an important factor in their investment decisions: 78% of investors with investable assets between $25M-$50M say ESG is important to their investment decision-making.

Yet many investors remain uncomfortable about potentially sacrificing returns. Our portfolio research shows that ESG funds did not necessarily perform better or worse than non-ESG funds during the time period reviewed, but they did introduce inherent factors that are important to understand.

Fortunately, you can align your investments with your values while maintaining a well-diversified portfolio tailored to your needs and goals. The process begins with discussing your values and thoughts about sustainability with your financial advisor. Your advisor will use the insights they gain to make a plan that pursues both your financial objectives and your sustainability goals. For families managing wealth across generations, this process may help bring family members of different ages together around a shared vision and purpose.

ESG and Performance

Investors increasingly use ESG data and analysis to develop deeper insights into companies’ material long-term risks — concerns such as exposure to physical, regulatory, reputational or litigation risks due to climate change, biodiversity, treatment of workers, diversity or other ESG-related factors.

Bear in mind that risk and return are related: Excess returns generally occur when an investor has accepted greater risk. Our research has found that exposure to distinct, well-established risk factors such as size, value and profitability can explain most ESG strategy returns. With this in mind, investors should be careful about giving ESG exposures too much credit (or blame) for ESG strategies’ returns. As with any investment, consulting with experts who have the proper research capabilities and manager due diligence will help you identify the solutions that offer the best potential for performance after accounting for fees.

To select the investment strategies best suited to you, starting with a clear definition of your values and the broad set of priorities you hope to fund throughout your lifetime is critical. Clarity about your values and goals will help you determine whether to use ESG strategies and, if so, which types to use. For example, investment approaches that exclude specific companies or sectors can cause portfolios to stray from their benchmarks. If you are not willing to make that tradeoff, consider approaches that provide exposure to best-in-class ESG strategies and retain broad diversification.1

Due Diligence on ESG Investment Strategies

To effectively align your investments with your values, you need to verify a manager’s ESG claims. For example, when investing with a strategy that claims to prioritize companies working to reduce carbon emissions, you want to be sure that its holdings report progress in that area. Gaining access to ESG reporting can help you understand your overall exposure and evaluate how effectively you are investing according to your values.

Northern Trust provides transparency into ESG-labeled products through its ESG data platform, which gives clients a much clearer understanding of their ESG exposures. You can see the ESG exposures of your specific portfolio, better understand how your portfolio compares to the broader investment universe, and gain insight into how investments aligned with your values may affect your portfolio’s risk factors and your ability to meet your financial goals.

ESG investment strategies can be useful tools for investors looking to apply their personal values or manage ESG-specific risks in their portfolios. Like any tool, they need to be appropriately used to achieve their intended result. With better data fueling the ESG strategies available, you can more effectively marry financial and risk-management goals with the ESG issues that matter to you.

Family Matters

Aligning sustainable-investing goals offers significant benefits for families:

  • Bringing Millennials and Gen Z, who research shows prioritize sustainable investing, into discussions about family values and legacy
  • Providing a common purpose to bond the family together and guide joint activities
  • Educating the rising generation on investing
  • Deriving shared meaning from family wealth

ESG investing can help transform shared family values into sustainable investment objectives. In the process, it may provide opportunities to engage a broader range of family participants compared to traditional investment discussions. Family members across generations often find they have more in common than they initially thought, and some may have unique perspectives that help the family reach better decisions.

Having an open, robust dialogue on substantive matters can create a culture of inclusion, foster good communication skills, and enhance a culture of joint decision-making that will serve a family long into the future. Through a robust dialogue on sustainability issues, generations align on a sustainable investment allocation while improving family harmony.

Consult an advisor to explore how to best align your investments with your values.

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  1. Best-in-class ESG is industry terminology referring to an investment approach that selects companies that are leaders in implementing ESG.

Disclosures

This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Periods greater than one year are annualized except where indicated. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.

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