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Withum Wealth Management Addresses Profits with a Purpose

Impact Investing in Today's Socially Conscious Business World

In today’s world, investors around the globe are more informed, interested and educated on environmental, social and governance issues (ESG) – each of which not only makes headlines but impacts portfolio construction considerations, according to the professionals at Withum Wealth Management. These factors include environmental stewardship, community impact, general and pay inequalities, inefficient operations, short-term strategic thinking and lack of diversity and opinion to name a few.

“Analyzing ESG factors offers a measurement system to capture trends that fundamental analysis might underestimate or even miss,” said James Ferrare, CFA, CPA, managing principal of Withum Wealth Management, which was co-founded in collaboration with national top-ranking accounting and advisory firm WithumSmith+Brown PC. “There is supporting evidence indicating that poor grades in these areas may lead to a higher probability of larger-than-normal drawdowns during time of market stress.”

In contrast, high-ranking ESG firms have lower employee turnover, lower borrowing costs, solid financials, diversified boards of directors, an above-average shareholder and stakeholder focus while, not surprisingly, exhibiting lower stock price volatility. “We find highly ranked ESG firms to be ‘high quality,’ which is quantitatively confirmed by a typically higher-than-average return on equity (ROE),” added Ferrare.

According to Ferrare, ESG analysis is sometimes incorrectly characterized as Socially Responsible Investing (SRI). To distinguish between the two, ESG is defined as an inclusionary, factor-driven methodology that aims to identify best-in-class companies. “It is perhaps a more profitable way to invest,” he said.
In contrast, SRI is an exclusionary practice that focuses on an “ethical” (i.e. socially conscious, green, sustainable) investment universe and prohibits certain investments because of a past corporate misstep, accident or manufactured product/service. Examples include gun makers, sin stocks, big oil, weapons, fast food and so forth.
“Utilizing ESG criteria allows for greater choice and, when linked with fundamental analysis, can exploit inefficiencies in the marketplace that may be the result of a company’s previous mistake, shifting consumer preferences or an unrecognized improvement in a company’s corporate culture,” explained Monica Jalife, CFA, CFP, principal, wealth advisor. “Investing requires trust and this can easily be fractured when proper controls and procedures are lacking. How companies respond to being reassigned from a ‘liked to ‘unliked’ category can have long-term implications for their future success.”

Unsocial Consciousness in the News

Ferrare and Jalife point to several high-profile issues that have recently made headlines illustrating social and governance impact. These include S&P CEO compensation issues at a time when average employee pay lags below pre-2008 recession levels, the high number of organizations and their lead talent who find themselves under intense scrutiny for sexual misconduct claims and the sharing of personal information without user knowledge or consent.

Does exclusively investing in top-ranked ESG companies really lead to superior absolute performance? “While there are no definite findings on this, we contend unbiased studies are inconclusive,” said Ferrare. “However – there is always a but – an overwhelming majority of studies/articles indicate an ESG overlay in the portfolio construction process does generate higher risk-adjusted returns.”

This is especially applicable to dividend-oriented and low-volatility strategies. Higher risk-adjusted returns provide a very desirable outcome: less risk for the same return – and if sustainable, that would be an extremely important and underappreciated finding. Jalife added, “Remember: with less risk, less downside volatility increases the likelihood investors stay the course and stay appropriately invested in accordance with their long-term plan.”

The professionals at Withum Wealth Management anticipate these trends will be carried forward by millennials, who want to make a difference and will. “We also would not be surprised to see some type of premium awarded to top-ranked ESG companies in the future,” said Ferrare.

Withum Wealth is a private wealth management firm specializing in lifestyle planning, personalized wealth counsel and tax-sensitive portfolio management that aligns with each client’s beliefs and convictions. The highly qualified team includes financial analysts, advisors, and CPAs as well as vast in-house resources committed to seamlessly integrating diverse wealth-related services. Withum Wealth advises clients in investment management matters as they navigate each new stage of life, including home purchases, business transitions, retirement planning, divorce, the death of a spouse and inheritance.

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