We are excited to announce the option of incorporating Environmental, Social, and Governance (ESG) focused investments into your existing investment program at RTD. Investors around the world are increasingly calling for greater alignment between their investments and their values, in conjunction with greater transparency about how and where their money is invested. This demand is driven in part by a growing awareness that ESG factors positively influence company value, returns, and reputation.
However, we recognize this approach is not for everyone. As a result, our recommended ESG-focused investment solutions will be implemented only for those clients who request it. If you are interested in learning more, we encourage you to reach out to your advisor team, who in conjunction with RTD’s investment team, can customize a plan to best meet your objectives.
While there are several ways to approach ESG-focused investing, we believe an ESG Integration strategy is the right approach for our clients at this point in ESG’s continuing evolution. ESG Integration aims to assess long-term financial risks and opportunities related to ESG issues as a core component of building a resilient and sustainable portfolio for the specific purpose of enhancing long-term risk-adjusted returns. This approach results in the analysis of all material factors in investment analysis and investment decisions, including environmental, social, and governance factors.
How Does this Affect my Portfolio?
A key component of ESG Integration is the potential to lower risk and enhance returns. Investors have turned to analyzing ESG factors as another way to spot and attempt to avoid risk in individual companies or sectors. The underlying premise is that well run companies with strong ESG management are likely to outperform in the long run. They are less likely to be involved in high profile examples of financially material ESG incidents like BP’s Deepwater Horizon oil spill in 2010, Volkswagen’s emission test scandal in 2015 and Facebook’s privacy issues with Cambridge Analytica in 2018. Incidents such as these cost these companies billions of dollars in fines and caused large declines in their stock price.
With that said, ESG Integration is a fairly new concept. While our back testing and stress testing have shown positive results, we have not yet seen how ESG Integration reacts through a full market cycle. A large percentage of the ESG-focused investment products have come to market in the past five years. This is a period of time that has been dominated by growth-oriented and Information Technology stocks which, in general, usually screen very well for ESG factors. While there are some who believe ESG is just another investment fad, we believe the concept of quality companies always striving to behave ethically is never out of style.
Our Next Steps
It is important to reiterate, that ESG Integration is meant as an enhancement to how we currently invest portfolios at RTD. ESG factors will not be the sole driving force behind portfolio construction for those who chose it, rather another due diligence factor in a comprehensive list of criteria that makes up RTD’s investment selection process.
We will still broadly diversify portfolios across market capitalizations, geographic regions and market sectors and industries identically to our non-ESG portfolios. If an ESG-focused option is not available in an asset class, we will continue to use the best-in-class non-ESG focused investments we have previously recommended. For those clients looking to integrate ESG into their portfolios, if within a taxable account, we will do so in a thoughtful manner to minimize taxes from the realizing of capital gains.
We hope this introduction to RTD’s availability of and approach to ESG Integration was informative. As this approach to investing evolves, we will keep you abreast of developments and how they impact our investment process and philosophy. For those interested, we look forward to further discussions about how best to integrate ESG into your ongoing investment program at RTD.