In 2004, a United Nations report titled “Who Cares Wins” offered the first known reference to ESG — environmental, social, governance — or the idea that investment decisions should be closely aligned to how a company treats its workers, the environment and the broader community.
Though the acronym might have been new, the concept was not. From so-called “sin stocks” to apartheid South Africa and fossil fuels, investors have long recognized the importance of withholding support from businesses that run counter to their values while actively investing in companies that can help them grow their wealth in line with their deeply held beliefs.
Politicians and pundits have recently politicized ESG, and it has fallen out of favor in some circles. However, investors continue to seek out ways to view their investments through the lens of their values.
A recent survey of 2,829 global individual investors found that 77% were interested in sustainable investing, with 54% of those surveyed saying they planned to increase these investments next year.
As we navigate a post-ESG environment, we can reframe the conversation to focus on what matters most — personalization. The truth is that ESG, though a worthy concept, has never really been used to align investments with values. Over the past 20 years, ESG has primarily served as a tool for multibillion-dollar companies to identify risks in their business models. It’s about scale.
Many investors don’t realize that all the largest ESG funds have holdings in oil and energy. Though that might seem counterintuitive, it makes perfect sense once you recognize that ESG has never been about the investor. The big ratings firms evaluate a company based on financial materiality — which is viewed through the prism of corporate management, not the investor’s perspective. That means a company like McDonald’s might have a higher ESG rating than a business focused on reducing greenhouse gases.
So while ESG may not be the bogeyman that some elected officials and the media have made it out to be, it’s clear that the term is ambiguous, if not misleading. To reframe the conversation and put the investor at the center, investors and advisers should embrace a new acronym — SEE, which stands for stakeholder, environmental impact and ethos.
If ESG is more about helping companies avoid risk, SEE helps investors actively align their investments with their values. Just as no two investors have the same financial goals, everyone has different beliefs and values. Some investors may prioritize the environment, while others focus on racial and gender diversity or staying true to their faith.
At its best, values-based investing should be like using GPS. When working with a financial adviser, investors can determine where they want to go financially. Using SEE, they can also personalize the experience, just like a driver can program GPS to avoid traveling over highways or using toll roads.
The SEE acronym reframes ESG
Replacing the “social” initial, the stakeholders’ bucket addresses a broad set of structures, from following labor laws to being thoughtful about product sourcing and packaging. As investors, we should know how companies are managing top-line or bottom-line growth — and the stakeholder initial focuses on those key areas.
For the environmental impact, investors and advisers should be able to choose from diverse options, ranging from how a company uses water and energy to emissions and compliance.
The second “E” in SEE addresses a company’s ethos. This is what makes a brand unique. Why someone would prefer to shop at Company A versus Company B. Every investor must determine what ethos means to them, and this is an area where an adviser can sit with their client to help them apply their values to their investments.
Despite the vilification of ESG, values-based investing is here to stay. Direct indexing has made it easier for investors to align their finances with their values; and now advisers and investors have an opportunity to move beyond the corporate-focused, plain-vanilla world of ESG, embracing a new acronym and tool for constructing values-based portfolios.