How can I invest in the environment’s future? Is my portfolio enabling companies that care about human rights? Are the companies I support operating ethically and do they advocate for things I care about? ESG investments keep these kinds of questions in mind.
ESG investing has its roots in an earlier movement of socially responsible investing (SRI). The ESG specific movement began in 2005 when Ivo Knoepfel published his report “Who Cares Wins.” In this report, Knoepfel both coined the term ESG and argued that his findings indicated that companies who care about environmental and social concerns are more successful. Since this report was published, there has been a steady rise in ESG investments.
In a world where people increasingly want to know whether corporate interests line up with their own environmental and social concerns, ESG investing is very relevant. In our sector, we see the rise of ESG real estate investing. Birgo itself was created as an impact-driven firm. With the rise of the ESG investment category, we found ourselves already dedicated to many of the practices ESG advocates for.
What is ESG?
ESG is a category for determining how well companies perform in three areas of concern: Environment, Social, and Governance. Hence E-S-G. Here is a breakdown of what each of these areas deals with:
E-Environment
Considerations in this area can include a company’s carbon emissions, air and water pollution, deforestation, green energy initiatives, waste management, and water usage, etc.
S-Social
Social concerns include issues of employee gender and diversity, data security, customer satisfaction, sexual harassment policies, foreign and domestic human rights, and fair labor practices, etc.
G-Governance
Governance in the ESG category looks at issues of how a company is run from the top down. Some issues covered here are the diversity of board members, political contribution, executive pay, large scale lawsuits, internal corruption, and lobbying, etc.
So, What is ESG Investing?
ESG investing uses these ESG criteria to make judgments about an investment’s financial returns. Those considering investing in a company weigh the returns in light of the company’s impacts on the environment, society, and governance. If the companies meet the ESG demands of the investors, the investors will be more likely to invest in those companies.
How Do I Know If a Company Meets My ESG Concerns?
This question is critical when considering ESG investments. The threat of “greenwashing” haunts consumers and investors. Greenwashing occurs when companies promote themselves with false claims to appear environmentally and socially conscious. Companies do this in hopes of attracting investors and increasing consumer profits. Private and public organizations are both making efforts to combat greenwashing. The Security and Exchange Commission has organized teams to investigate disparities between companies’ ESG claims and actual practice. Independent research firms such as Morningstar, Glassdoor, and MSCI have created scoring systems based on companies ESG performance. For ESG real estate investing, the Global Real Estate Sustainability Benchmark (GRESB) assesses and reports on the ESG performance of real estate assets. Anyone interested in ESG investing should look at these kinds of analytics to know if a given stock, mutual fund, or real estate asset meets their ESG criteria.
ESG Real Estate Investing
The ESG real estate investing world is rapidly expanding. As Investors start to place value on reducing the carbon footprint of properties, developers are taking great efforts to make both new and established properties more green. Developers not only look to benefit from this change in investor preferences, but are also facing tightening regulations on carbon footprint and other environmental factors.
ESG real estate investing has a big role to play in the S of E-S-G. Real estate investments, especially multifamily and commercial assets, have huge potential to shape communities for the better or the worse. Real estate funds that are mindful of ESG practices consider how their ownership and operation of large assets can help improve a community economically and socially.
Governance plays a large role in ESG real estate investing as well. As with any organization that is serious about their ESG performance, firms in the real estate investment space are looking to improve corporate social responsibility (CSR) and ESG benchmarking.
How Do ESG Investments Perform Financially?
ESG is a rapidly growing field of investment. The US SIF Foundation’s 2020 trends report stated that U.S. assets managed by ESG strategies grew 42% from 2018 to 2020, with a jump from $12 trillion to $17.1 trillion. In 2019 the Morgan Stanley Institute for Sustainable Investing published a study finding that from 2004 to 2018, ESG mutual and exchange traded funds posted total returns comparable to non-ESG funds. This study also found that ESG investments had lower downside risk in the financially troubled years of 2008, 2009, 2015, and 2018. More recently, ESG investment returns have fluctuated less than standard investments in the wake of the COVID-19 pandemic. Some studies have found ESG investment to even outdo standard investments. The JUST U.S. Large Cap Diversified Index (JULCD) reports that in recent years, ESG investments have returned 15.94% on an annualized basis in comparison to the Russell 1000’s (a standard investment index) 14.76% return.
Why Should I Take Part in ESG Investing?
As Morningstar puts it on their website, “You don’t have to pick income or idealism. You can choose investing success and personalized impact. This is the new face of long-term investing.” According to its advocates, ESG investing allows you to balance the profitability of your assets with your personal concerns and convictions.
Intrigued? Here Are Some Options to Get Started ESG Investing.
Two main avenues exist to start ESG investing: find and evaluate ESG investments on your own or use the help of an advisor (either human or digital). If you do choose to venture on your own, the first step is opening a brokerage account. Once you have done that, the key aspect of building an ESG portfolio is determining what companies fit your personal ESG criteria and are not guilty of greenwashing. Investment research firms are the way to go here. Morningstar has two great tools for this task. One is the Sustainalytic ESG Risk Ratings, which examines stocks on an ESG basis. The other is the Morningstar Sustainability Rating which evaluates ESG risk in mutual fund portfolios. When considering ESG friendly mutual funds, some mutual funds have been created specifically to be ESG funds such as the Thornburg Better World International (TBWIX).
On the real estate front, GRESB creates a list of ESG friendly assets and portfolios based on yearly ESG assessment members. As an ESG conscious firm, we also advocate for ourselves if you wish to join a community of multifamily investors aiming to improve lives through real estate.
Birgo and ESG
Birgo is focused on building thriving, sustainable communities through real estate investment marked by integrity and care. We are mindful of environmental stewardship, taking initiative to reduce our carbon footprint and water use. We are committed to improving the lives of all our stakeholders, from our largest investors, to our dedicated employees, to each tenant in our multifamily properties. In the perceived cloak and dagger world of private equity, we hope to shine as a firm of holistic excellence, transparency, and vision. To see how we did this in 2022, check out our THRIVE Report, and if you’d like to join us, explore BirgoCapital.com or schedule a call with our IR team.
