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ESG: Environmental, Social, Governance1

Times change, as do we. Today our recycling bins fill more quickly than our trash bins. We prefer electronic statements to the paper ones, and bring reusable bags when we shop. We seek out the products and services from companies which are transparent in their activities, and treat their employees and communities fairly and with respect — and actively avoid those companies which do not. We strive to align our actions with our values.

But there has been one service that has been challenging to align with our values — our investments. You could do it yourself, but discovering stocks and bonds that are both undervalued and "socially responsible" is time prohibitive if done thoroughly, and frequently results in an undiversified portfolio. You could also do it by investing in ESG mutual funds, but most of them have high management fees which weigh heavily on investment returns. But thanks to the recent launch of new ESG indexes,2 and exchange-traded funds (ETFs)3 that track them, this is no longer the case.

In 2013, the proliferation of low cost, commission-free index ETFs enabled AlphaGlider to begin offering core investment strategies that were low cost (fund management, trading, and advisory fees), highly liquid, diversified, tax efficient, transparent, aligned, and actively managed. In 2019, the introduction of new low-cost, commission-free ESG index ETFs enabled AlphaGlider to do the same for sustainable, social responsible investing. Introducing the AlphaGlider ESG Investment Strategies.


ESG Criteria

AlphaGlider ESG Investment Strategies primarily utilize ESG ETFs indexed to ESG indexes maintained by established benchmark providers such as MSCI and FTSE Russell. Some examples of the criteria they use to construct these ESG indexes include:

Environmental — Standards for conservation and protection of the natural environment. Examples include:

  • climate change,

  • energy sources, use, and conservation,

  • pollution and waste management,

  • air and water quality,

  • natural resources and land use, and

  • environmental opportunities.

 
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Social — Standards for corporate interactions with people at all levels. Examples include:

  • equal employment opportunities,

  • workplace health and safety,

  • product safety and liability,

  • local community impact, and

  • social opportunities.

Governance — Standards for company leadership and risk controls. Examples include:

  • ethical business practices,

  • board independence and audit committee structure,

  • board and executive diversity,

  • executive compensation,

  • transparency of lobbying, political contributions, accounting, and tax payments, and

  • shareholder rights.

 
 
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ESG Fund Management Fees

Major fund managers have recently committed to the ESG space, now offering ESG funds that cover most of the core asset catagories, such as US, foreign developed, and foreign emerging equities, as well as US aggregate and corporate bonds. Additionally, our independent custodians, Charles Schwab & Co., Inc. (“Schwab”) and my529, have also embraced the ESG movement, and now offer commission-free trading for many of the most attractive ESG funds in the marketplace. ESG investing has gone mainstream, allowing AlphaGlider to offer actively managaged strategies that are not only sustainable and socially responsible, but also sufficiently low-cost, transparent, and liquid.

As shown below, the fund management fees of the AlphaGlider ESG Strategies are significantly less than that of the average equity and bond funds, and are less than 7bps (0.07%) higher than that of the original AlphaGlider Core Strategies. As ESG investing continues to mature, we expect the breadth of ESG fund offerings to grow, their costs to decline, and their liquidity to improve.

Fund Management Fees, AlphaGlider ESG Strategies vs Average Mutual Funds

Source: AlphaGlider, Investment Company Institute

 

NOTE: AlphaGlider ESG Strategy fund management fees as of December 31, 2023, and are subject to change without notice. Average equity and bond mutal fund expense ratios are simple averages during 2022 by the Investment Company Institute 2023 Investment Company Institute Fact Book, pg. 74.

 
 
 

Help the Environment Two Ways

You benefit the environment not only with your ESG investments, but also with your advisory fees. As a 1% for the Planet business member, we contribute one percent of our total annual revenue to nonprofits working to combat climate change.

 
 
"I don't think our fiduciary duty is to put shareholders first. I say the opposite. What we firmly believe is that if we focus our company on improving the lives of the world's citizens and come up with genuine sustainable solutions, we are more in synch with consumers and society and ultimately this will result in good shareholder returns.”


— Paul Polman, former CEO of Unilever

 

 

Notes & Disclosures

Past performance is no guarantee of future results. Investing involves risk, including the loss of principle.

Small capitalization securities involve greater issuer risk than larger capitalization securities, and the markets for such securities may be more volatile and less liquid. Specifically, small capitalization companies may be subject to more volatile market movements than securities of larger, more established companies, both because the securities typically are graded in lower volume and because the issuers typically are more subject to changes in earnings and prospects.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries. Shares, when sold, may be worth more or less than their original cost.

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person.

1Environmental, Social and Governance ("ESG") investing involves certain risks because the methodology of an underlying strategy selects and assigns weights to securities of issuers for nonfinancial reasons. As such, an ESG strategy may underperform the broader equiity market or other strategies that do not utilize ESG criteria when selecting investments. The compaines selected as demonstrating ESG characteristics may not be the same companies selected by other providers that use similar ESG screens. In addition, companies selected may not exhibit positive or favorable ESG characteristics. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on a strategy's ability to invest in accordance with its investment policies and/or achieve its investment objective.

2Indices are unmanaged and investors cannot invest directly in an index. The performance of indices do not account for any fees, commissions or other expenses that would be incurred.

3Mutual funds and exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.