What Filters do ESG Investments Use

Sustainable
Written By Corey Noyes

The answer to this question can be a little more involved than you might think, because the real answer is; It depends. One of the unique things about ESG investing (which by the way stands for environmental, social, and governance) is that there are a lot of options for what specific things you want to exclude from your portfolio. You can find funds that exclude heavy polluters, weapons technology, nuclear technology, and the list goes on and on.

Lets take a look at each of those three categories and see what kinds of filters are used to select companies you can feel good about owning.

Environmental

The most common filter employed by indexes in the green investing category is to simply exclude companies that are involved with fossil fuels. For most of the index managers however that is just the starting point. Funds get their info from publicly available reports like the Global Reporting Initiative (GRI) or the Principles for Responsible Investment (PRI). Additional filters can include;

  • Fossil fuel use (goodbye airlines and cruise ships)

  • Overall carbon emissions.

  • Water use, land use.

  • Resource depletion.

  • Recycling.

  • Renewable energy use.

Social

The social filters are all about people. How do companies treat people. Employees, Customers, Suppliers, and the general public. Indexes use the same GRI and PRI to filter these, butt hey will also look to things like Fortune’s Best 100 Companies to Work For. Some of the filters they use are;

  • Employee treatment, pay, and benefits.

  • Employee engagement and staff turnover/churn.

  • Employee training and development.

  • Employee safety, and sexual harassment prevention policies.

  • Diversity and inclusion in hiring.

Governance

This is the most dry section of ESG. It’s all about boards of directors and management. Indexes take a look at how companies are run, and if there and if corporate incentives are aligned with business success for the long term. She of the specifics include;

  • Executive compensation.

  • Executive and management diversity.

  • Corporate transparency.

  • History of interactions with the SEC.

One of the biggest benefits of working with Balanced Capital, is that you can work with your advisor to create a comprehensive list of the things you want to exclude. Then we can go find the investments that meet your specific requirements, and align to your financial goals.

Corey Noyes
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