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Five tips to navigate the complicated world of ESG investing

Investors who want their holdings not just to do well but also do good can find that the criteria for what is right can be hard both to figure out and to agree on

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Family offices and their advisors are seeing not only more interest among their clients, but also a broader uptake in investments that follow responsible environmental, social and governance guidelines and seek to have a positive impact on the planet.

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While the trend is noticeable, it’s not universal.

And family offices share one of the challenges that all investors face when considering environmental, social and governance (ESG) guidelines, or socially responsible and impact investing — agreeing on exactly what these terms mean.

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It can be complicated to agree on what investments meet ESG, responsibility and impact criteria, says Mark Auger, enterprising family office advisor and co-founder and chief executive officer of Crysalia, based in Montreal.

ESG refers generally to standards to follow that are either good for, or not harmful to, the environment, are socially progressive and to businesses that are operated and overseen by management and directors who follow transparent and ethical standards.

Socially responsible investments go a step further, seeking to have a positive effect — for example through clean technology. Impact investments extend this even more, seeking to bring about specific, positive change — for example, by aligning their products and factories with the United Nations Sustainable Development Goals, which are key metrics for addressing climate change.

Family offices that want their holdings not just to do well financially but also do good for the planet and people can find that the criteria for what is right can be hard both to figure out and to agree on. Family offices buying, selling or considering whether or not to hold particular businesses need a roadmap. Here’s a quick guide:

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1. Get help

The criteria are vague, sometimes arbitrary and constantly evolving for what investments are environmentally and socially responsible. Professional analysts use screening tools to determine how well companies and funds adhere to ESG and impact policies. Families will want to go with investments that are consistent with their own values; professionals can help find out which ones make the grade.

2. Understand the different terms

ESG, socially responsible investing and impact investing are similar, but not identical. It’s a minefield of definitions, but it comes down to a matter of degree — ESG and responsible investments generally aspire to a light footprint on the planet, while impact investing seeks to change the world through good products and practices.

3. Use screening tools

Screens such as the FTSE ESG Index and S&P Global Ratings can help investors navigate and understand the differences between investments that do well and those that also do good. It’s important to look carefully at the different criteria each screen uses though, because they can differ. For example, a company can have excellent labour practices and use fur in its manufacturing, which may be okay for some families but not for all.

4. General considerations

While every family will have different ideas of what is good, here are some general guidelines. On the environment, look at a company’s energy use, waste management and pollution and how it handles resources, for example through no-till and pesticide-free agriculture and reforestation.

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On the social side, how does the company treat its staff — not just through pay but also benefits and day-to-day treatment such as sick leave, child care and — especially important in pandemic times — enabling people to work at home.

On the governance side, families will want to know and have a say in who runs the business the family holds and how it is run. Are the executive salaries commensurate with the work the executives do? How much and in what way does the company get involved in public causes, such as encouraging voter turnout or diversity?

5. It’s still business

ESG and impact investors try to align with building a better world, but at the same time, their investments are not charities; they’re supposed to make money. The good news is that a large analysis of nearly 250 separate studies between 2016 and last year found that 92 per cent of the time, there was either a positive, neutral or mixed performance by ESG-oriented investments compared with non-ESG ones; only 8 per cent of the time did the non-ESG investments do better.

SOURCES: Principles for Responsible Investment, MSCI, NYU Stern, Financial Times of London

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