ESG, Risk Management, and Alternative Investments

What is ESG investing?

ESG investing may be the best way to align your personal beliefs or ideals with your chosen investments. 

Rather than purchasing broad indices, you may want to exclude certain companies or entire industries from your portfolio based on your personal values. For example, you might want to exclude companies involved in weapons, alcohol, gambling or non-renewable energy. On the other hand, you might have a preference for companies that have exemplary levels of diversity and labor standards.

This is the new world of ESG investing, sometimes known as 'Impact Investing'. ESG i is a theme that has taken hold in Europe and is growing very quickly in the U.S.. Morningstar research now includes 'sustainability ratings' in some of their investment reviews. Now you can make an impact on the world and align your beliefs with investment selections that may exclude companies based on factors that you choose to include or exclude:

  • Environmental criteria allows for sustainable impact on the natural environment,
  • Social criteria, including its relationships with employees, clients and communities, and
  • Governance of company board members, executive pay, diversity and shareholder rights

By combining traditional investment selection techniques, with the exclusion of those companies that fail to meet ESG factors, you can seek to do well, and do good, at the same time. 

How does risk management work?

I do not believe that asset management alone can substitute for risk management. 

After determining what your attitudes are toward investing, and your financial goals, I can recommend strategies that may reduce investment risks. These include:

1) Allocating into multiple assets classes.

This means more than simply stocks and bonds.

Other asset classes include commodities (such as precious metals and agriculture), real estate (both in the U.S. and international), alternative investments that are not traded on an exchange, and several more.

2) Dollar cost averaging

Simply means investing regularly over time, can reduce the risk of investing at market highs. For risk adverse investors, this can be a good strategy for a portion of their portfolio.

3) Buying guarantees.

You can purchase products like fixed annuities or C.D.s that guarantee principal, with a low return, and minimal risk of loss. Although this is what the most risk-averse clients may need, there could be an opportunity cost if funds are locked into a low-yielding investment and interest rates rise over time.

4) Hedging against retirement savings losses with annuities.

The expenses associated with annuities represent the cost of guaranteeing retirement income benefits regardless of market performance. Some annuities allow your invested account balance to 'lock in' regularly, and guarantee an income stream from those 'locked in' values, regardless of declines in the financial markets. This contrasts sharply with pure investments such as stocks, bonds, mutual funds or ETFs, which may cost substantially less, but offer no guarantee of an account balance for retirement income. Allocating some funds to annuities may be advisable for those concerned with market declines negatively impacting their retirement income.

5) Hedging against a loss of time by shifting the risk to an insurance company.

Investing requires time for assets to accumulate value, and there are no guarantees. A premature forced liquidation of financial assets, especially during down financial markets, should be avoided if at all possible. A better strategy is to include some life insurance as a part of your financial plan. It is the only asset class that will protect your financial plan against the loss of time - the time you had planned on to accumulate wealth and guarantee the achievement of your financial goals for your spouse, children, grandchildren, charities, etc..

The cost of this guarantee is usually minimal in relation to the risk that you have shifted to an insurance company. In fact, the low cost of the benefit is why many smart business and estate plans include life insurance to fund anticipated income and/or estate taxes.

What are alternative investments?

Client Centered

Broadly speaking, alternative investments are investments in assets other than stocks, bonds and cash (commodities, for example) or investments using strategies that go beyond traditional ways of investing.

Some alternative investments, such as non-traded real estate investment trusts (REITs), or income funds based on privately underwritten loan portfolios, do not trade on exchanges and do not have the liquidity that may be more appropriate for most investors. Still, since alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk, and enhance returns.

*All Investing involves risk including the potential loss of principal. No investment strategy including buy and hold and diversification can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary and therefore this information should only be relied upon when coordinated with individual professional advice. This information is not to be taken as investment advice or a guarantee of future results.