By Jim Rankowitz, CFP®, CSRIC™, Senior Vice President – Investments, Senior Financial Advisor
April 2024
There are a lot of similarities between chefs and financial advisors.
For anyone who cooks, you know that the right mix of ingredients makes the recipe successful. You can’t just throw a bunch of things together and “hope” you get a good outcome. There are good recipes (and bad ones), proper techniques and proportions, years of experience, well-selected ingredients and high-quality tools which all go into the ultimate goal of a quality dish.
I think about portfolios in terms of cooking. Ingredients and recipes to be specific.
Individual investments are the ingredients, and the allocation of investments is the recipe. You can have good ingredients with the wrong recipe. You don’t need chocolate for making a salad, and you don’t need a burger if you are making breakfast. Not to say chocolate and burgers aren’t great, they are, they just don’t match the recipe. With investing, you must understand your recipe before you start picking out your ingredients.
Bon Appetit.
By Jim Rankowitz, CFP®, CSRIC™, Senior Vice President – Investments, Senior Financial Advisor
April 2024
In our opinion, ESG integration is the most commonly used ESG and impact investing technique. ESG is the assessment of material non-financial environmental impact, social capital and corporate governance considerations of companies. ESG integration is the incorporation of this ESG information into the investment decision process. Most ESG integration strategies use this data to minimize ESG-related risks that are perceived to have an adverse current or future financial impact on the company.
ESG integration involves analyzing ESG information, identifying material ESG factors, deciding which ESG factors apply to each region, sector and company, and applying the ESG analysis into the investment decision process. In practice, the analysis is usually a combination of outsourcing through third-party data providers and in-house proprietary ESG analysis. The decision on how to apply the ESG factors can vary from firm-to-firm based upon their expertise and is often viewed as a way to differentiate oneself from your peers. Finally, the application of the ESG analysis into the investment process is also a way which managers differentiate themselves. Some firms pre-screen an investment universe, and then manage the portfolio based upon this list. Other firms choose their investments and then change the weightings based upon the ESG analysis.
A few years ago, only a handful of firms actively used ESG integration, but we are now seeing more and more asset managers utilizing this technique as part of their approach.
‘Sustainable’ or ‘Social Impact’ investing focuses on companies that demonstrate adherence to environmental, social and corporate governance (ESG) principles, among other values. There is no assurance that social impact investing can be an effective strategy under all market conditions or that a strategy’s holdings will exhibit positive or favorable ESG characteristics. Different investment styles tend to shift in and out of favor. In addition, an investment’s social policy could cause it to forgo opportunities to gain exposure to certain industries, companies, sectors or regions of the economy which could cause it to underperform similar portfolios that do not have a social policy. Risks associated with investing in ESG-related strategies can also include a lack of consistency in approach and a lack of transparency in manager methodologies. In addition, some ESG investments may be dependent on government tax incentives and subsidies and on political support for certain environmental technologies and companies. The ESG sector also may have challenges such as a limited number of issuers and the lack of a robust secondary market. There are many factors to consider when choosing an investment portfolio and ESG data is only one component to potentially consider. Investors should not place undue reliance on ESG principles when selecting an investment.