April 22nd is Earth Day, so it’s only appropriate that we take a moment to address concerns of how Socially Responsible Funds (also known as ESG, or Environmental, Social, Governance) investments are weathering the current administration’s promotion of fossil fuels and focus on changing the narrative around climate change, and less on diversity and equity.
To start, let’s define what Socially Responsible Investments (SRI) and ESG investing is. Socially Responsible investing focuses on businesses that typically exclude specific ethical criteria such as tobacco, gambling, or fossil fuels. As a result, most Socially Responsible funds are not likely to be too heavily impacted by this administration’s change in focus as many concentrate on companies that aren’t doing anything drastically harmful to the world at large. In other words, by default they are considered Socially Responsible.
To better illustrate this, let me give you a few examples of Socially Responsible companies. Let’s think of a hypothetical tech company, Acme Tech. Acme Tech is an AI search engine where consumers can go to search the web for keywords or ideas. Barring any other ESG issues, this company could be considered a Socially Responsible company as it isn’t actively harming anyone or anything.
Another example might be a financial institution that provides loans and deposit accounts to consumers. Let’s call this hypothetical bank Fake Bank. Fake Bank employs a diverse group of individuals, provides loans and bank deposit accounts to the community at large, and isn’t actively harming anyone or anything. Once again, this company could be considered a Socially Responsible company.
ESG (Environmental, Social, Governance) companies are those that score positively when evaluated based on their environmental impact (like carbon footprint), social practices (such as diversity and labor rights), and governance (like transparency and ethical leadership). Such companies actively participate in ESG motivated causes and are more poised to see difficulties ahead due to the administration withholding support through tax incentives or other government spending. Examples of these companies or industries could be those focused on producing electric cars, batteries or other renewable energy technologies, green mass transit solutions, fair trade goods, and sustainable/organic farms.
This all may sound like a call to invest in SRI investments and divest from ESG, but that’s not the case. Despite the government’s recent actions many companies within these industries are actually doing well! Of course there is no guarantee that a company with a strong ESG or SRI score will outperform a company with a lower score in any given market environment, but similar to the first Trump administration, many people are looking in the mirror and realizing the power they have and reacting on a grassroots level. It’s possible that instead of the loss many might be experiencing within this type of investment, instead we will see a boon. That, coupled with the long-term need for sustainable change, gives reason enough to consider continuing to put your money where your mouth is and staying the course.