What is ESG Investing?
ESG practices may be a force for change
Sound ESG policies can potentially enhance stock performance
Socially Aware Portfolios are now available through Essential Portfolios
TD Ameritrade Investment Management now offers Socially Aware Portfolios which leverage Environmental, Social, and Governance (ESG) investment principles that:
Allow you to align your investments with your values
Are intended to improve a company's operational performance while attempting to mitigate certain risks, which may positively influence its stock price1
Factor in corporate practices, which can help uncover investment opportunities
The goal of ESG investing is to identify companies that are attractive investments and have strong ESG ratings. This investing approach evaluates a company's financial standing along with the following three factors:
Environmental issues - companies that pose less environmental risk than their peers
Social issues - companies that promote strong labor relations with their employees, allowing them to retain a high percentage of their workforce and customers
Governance issues - companies that promote transparency and diversity surrounding a firm's management framework
Socially Aware Portfolios provide exposure to ESG investing through the selection of exchange-traded funds (ETFs) that leverage ESG inputs from MSCI ESG Research, a leading provider of ESG research, ratings, and indices. If a company earns a higher score than it's industry peers across the three ESG categories (environmental, social, and governance), MSCI assigns a higher ESG rating, which is a growing factor in the investment decision-making process for many investors. Here are some common examples of ESG issues:
Climate change & carbon emissions
Air & water pollution
Data protection & privacy
Gender & diversity
Climate Board composition
Audit committee structure
Bribery & corruption
Many companies are improving their ESG practices to help reduce risk in response to growing interest in ESG investing from mainstream investors. Some examples of how companies have responded to ESG concerns are:
Environmental: "The health and safety record of BP in the run-up to the Gulf of Mexico oil spill in 2010 was worse than that of its peer group. When this fact was brought to the fore after BP's share price had fallen, it reinforced the need to analyze ESG performance indicators."1
Social: "In the 1990s, Nike was associated with sweatshops in its supply chain in developing countries but Nike took corrective measures to address the issue."1
Governance: Wells Fargo & Co. announced in March 2018 that "four board members will retire, less than a month after the Federal Reserve barred the bank from future asset growth beyond the current $2 trillion balance sheet until it improves corporate governance and addresses other failings. The board shakeup represents the latest fallout from allegations by regulators, customers and employees that Wells Fargo over the past decade set overly aggressive sales targets that resulted in abusive practices towards consumers...."2
An old misconception was that factoring ESG criteria into the investment equation would diminish returns. However, a number of studies show that ESG practices may favorably affect stock price performance.1 The MSCI ACWI ESG Leaders Index, which provides exposure to companies with high ESG performance relative to peers, outperformed its parent index, which doesn't consider ESG factors, over the 2008 - 2017 period and 8 out of 10 years (see table below).3 We believe strong ESG practices can lead to better operational performance, which could ultimately have a positive influence on a company's stock and bond prices.
Environmental, Social, and Governance Leaders Index Outperformed Parent MSCI Index Over 2008-2017
(Annual Performance %)
MSCI ACWI ESG Leaders
Past performance does not guarantee future results and investing success. For illustrative purposes only. Source: Based on performance of MSCI ACWI ESG Leaders Index.
TD Ameritrade Investment Management is excited to offer five Socially Aware Portfolios that provide exposure to ESG investing through low-cost, well-diversified, exchange-traded funds (ETFs) that are designed to suit different risk tolerances and investing goals. Now may be a good time to consider investing in portfolios such as these because many companies are providing more extensive data about their ESG practices, and ESG research and analysis methods have become more advanced. With Socially Aware Portfolios, you can invest in companies with stronger governance practices and implement strategies that may align with many of your values, while potentially generating returns that are competitive with non-ESG strategies.
Learn more about our Socially Aware Portfolios or contact us at 800-665-1978.