SG Analytics

Summer Internship Report

NIKHIL GANGARDE

Student Name : Nikhil Gangarde Presented to:

SAP ID : 80501180016 Faculty Mentor: Prof. C. Adhikari
Roll No. : A013 Industry Mentor: Mrs. Shubhshree Pareek
 PREFACE

The PGDM degree is not an end to itself, but a means to an end. As a part of my PGDM
course at NMIMS Navi Mumbai and to gain practical knowledge to the full potential in the
field of Finance, I was required to do a two-month summer internship at SG Analytics. In
accomplishment of the internship, I am submitting this Report to describe the 2 months
internship, the necessary training and mentoring regarding the organisation and the nature of
work. It was indeed a splendid experience to work in an organisation with such young minds,
shaping the vision of the company where every day felt like a new day.

I take great pride in presenting my report that describes my experience at SG Analytics.

Subject to limitation of time and resources, every possible attempt was made to accomplish
all tasks and understand each problem deeply. The internship majorly revolves around the
practical and ground understanding of a career in ESG research and how all other streams are
inter related. I have tried my best to eliminate any errors or misrepresentation of facts. If the
report can help anyone with any information, I will feel that the purpose of the internship and
presenting the report has been achieved.

Pune Nikhil Gangarde

09/06/19
 ACKNOWLEDGEMENT

Working in SG Analytics was interesting and ever enlightening. I would like to express my
sincere gratitude to Mr. Srobon Banerjee and Mrs.Shubhshree Pareek for providing their
invaluable guidance, comments and suggestions throughout my internship period. They gave
me experienced guidance on the nuances of the process and overall the entire experience of
how the work is done. I would also like to thank all the other associates – Saket, Payal,
Mujtaba, and Ankita, with whom I have closely worked and for their instant availability
whenever needed.

Lastly, I would like to express my gratitude to the entire Placement Committee, NMIMS
Navi Mumbai to have given me a chance to intern with such a prestigious organisation and
carve myself holistically.

Nikhil Gangarde
 EXECUTIVE SUMMARY

Ever heard of Qin shi Huang?

Probably not! You may know him as the emperor who unified China or built the great wall.But he
was very much responsible for China's economic growth and prosperity by taking the path of social
welfare; achieved by innovations in irrigation technology, building roads and standardizing language.
Or call it "Socially responsible investing".

It can be seen in leaders of cultures as ancient as China's, India, United States and the list goes on. So
why is it important? Here's why:

Because, as aware are we that there is no planet B; how about make some money by taking care of the
environment as well. Gives you sustainable financial return. For a fact, the S&P US Carbon Efficient
Index has been outperforming the S&P 500 Index. (Source: The guardian.com)
Environmental, Social, Governance or ESG investing is a term encapsulating the following related
investment categories:
 socially responsible investing
 responsible investing
 impact investing
 ethical investing
 values investing
 green investing
 sustainable investing
 Investment issues in corporate governance such as gender and ethnic diversity in addition to
pay equity in all areas of management.
While in the same arena, every one of these investment strategies can be slightly different, identical,
or they can be rolled up into one fund. It is a complex area. Making this even more confusing is that
we, in the industry, use many of these terms interchangeably. But the investment business appears to
have settled on the term ESG as the catch-all description.
What does it mean? A useful summary comes from the Financial Times:
“The definition ESG (environmental, social and governance) is a generic term used in capital markets
and used by investors to evaluate corporate behaviour and to determine the future financial
performance of companies.
ESG factors are a subset of non-financial performance indicators which include sustainable, ethical
and corporate governance issues such as managing the company’s carbon footprint…
There are different investment vehicles to funnel client funds into ESG investments, but much of ESG
investing is done through the purchase of mutual funds, either open-ended or ETFs. Those of us in the
trade know that on Wall Street if something is worth doing, it is worth overdoing, so there are
approximately 636 ESG funds according to the US SIF (Social Investment Foundation). However,
Morningstar says there are 275 ESG funds. This difference underlines a common issue in the world of
ESG investing: authoritative sources give different numbers of both funds and assets under
management.
There are also many different ways of defining what is and what is not an ESG fund based on the
equities the fund purchases. One person’s ethical investment is another person’s unethical investment.
Consider a corporation which builds warships for the US Navy and even works with the navy on pilot
programs to power ships using biofuels.
This company could have an excellent ESG record, and many clients would approve this company as
an investment while others may not approve of purchasing shares in a company which produces
military hardware. This points out the need to understand the lens through which a client determines
what characteristics qualify an ESG candidate as acceptable in meeting their criteria, before making a
recommendation.

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 TABLE OF CONTENTS

I. Preface [i]

II. Acknowledgements [ii]

III. Executive Summary [iii]

IV. Introduction [1]

V. Objectives [5]

VI. Methodology [6]

VII. Learning outcome [7]

VIII. References [12]

 INTRODUCTION

There are a variety of different investing philosophies within the responsible investing realm. One
method you may have been hearing about more and more is ESG investing.
The letters "ESG" stand for environmental, social, and governance. Investors who employ this
strategy examine criteria within these three categories to analyze stocks. Combining the ESG lens
with more traditional stock analysis techniques is known as ESG integration. Anyone can join the
swelling ranks of ESG investors by simply learning more and then using this framework in making
future investing decisions.

It's no wonder ESG investing is gaining traction. Research is increasingly showing that this investing
method can reduce portfolio risk, generate competitive investment returns, and help investors feel
good about the stocks they own.
What is ESG?
First, let's demystify the ESG acronym to highlight what ESG investors look for when seeking stocks
to analyze. ESG investing entails researching and factoring in environmental, social, and governance
issues, in addition to the usual financials, when evaluating potential stocks for your portfolio.
E is for environmental
The environmental component requires research into a variety of elements that illustrate a company's
impact on the Earth, in both positive and negative ways. A company that's an actively good steward
for the environment might be deserving of your dollars.
Environmental topics to research and analyze include:
 Climate change policies, plans, and disclosures.
 Greenhouse gas emissions goals, and transparency into how the company is meeting those
goals.
 Carbon footprint and carbon intensity (pollution and emissions).
 Water-related issues and goals, such as usage, conservation, overfishing, and waste disposal.
 Usage of renewable energy including wind and solar.
 Recycling and safe disposal practices.
 Green products, technologies, and infrastructure.
 Environmental benefits for employees such as cycling programs and environmental-based
incentives.
 Relationship and past history with the U.S. Environmental Protection Agency (EPA) and
other environmental regulatory bodies.
For those details, locate sustainability reports prepared using respected sustainability standards such
as Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI). Corporate
websites with sustainability pages can be useful for budding ESG investors, but be wary when they
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don't contain enough detail to paint a complete picture. For example, we can appreciate companies
that demonstrate a commitment to recycling, but that alone would not merit a check in the "E"
category. Note how the word "goal" is sprinkled throughout the above bullet points. While goals are
nice, concrete numbers and metrics that demonstrate real progress are much better.
Nike is a company that meets the environmental criteria of ESG. A leader in environmental
dedication, Nike has a chief sustainability officer that oversees its many environmental efforts. Its
Flyknit and Flyleather products were developed with environmental sustainability in mind. Nike
signed onto a coalition of companies called RE100, vowing to source 100% renewable energy across
its operations by 2025. There's more, but any interested investors should read Nike's latest
sustainability report, which uses the GRI framework, the Sustainability Accounting Standards Board
(SASB), and the United Nations' Sustainable Development Goals (SDG) -- all great examples of the
valuable data that ESG investors should look for.
S is for social
The social component consists of people-related elements like company culture and issues that impact
employees, customers, consumers, and suppliers -- both within the company and in greater society.
For information on social aspects, ESG investors should look to sustainability reports that use a
respected standard like GRI or PRI, because those sustainability reports go beyond environmental
issues to include information on employee, supplier, and community elements, too.
It's also useful for ESG-minded investors to keep up with respected lists and annual rankings,
including Fortune's Best Companies to Work For and Forbes' Just 100. Pay attention to media reports
related to how companies treat their employees and their lobbying efforts for or against social justice
issues. Another really good place to gauge how a company and its management is received by its
workers is employee review website Glassdoor.com.
Social topics to research and analyze include:
 Employee treatment, pay, benefits, and perks.
 Employee engagement and staff turnover/churn.
 Employee training and development.
 Employee safety policies including sexual harassment prevention.
 Diversity and inclusion in hiring and in awarding advancement opportunities and raises.
 Ethical supply chain sourcing, such as conflict-free minerals and responsibly sourced food
and coffee.
 Mission or higher purpose of the business (or lack thereof).
 Consumer friendliness, customer service responsiveness, and history of consumer protection
issues including lawsuits, recalls, and regulatory penalties.
 Public stance on social justice issues, as well as lobbying efforts.
Accenture (NYSE:ACN) has an admirable workplace approach, earning it a spot on Fortune's list of
Best Companies to Work For for 11 years. Accenture pays close attention to its diversity and
inclusion in its workforce. The company plans to improve its workplace gender ratios, with a goal to
have 50% female and 50% male employees by the end of 2025. Accenture plans to better its corporate
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makeup as well, pledging to have at least 25% female managing directors by 2020. If you crack open
Accenture's Corporate Citizenship Report, you will find that its efforts satisfy some of the UN's SDG
framework, and the report also uses the GRI disclosure standard.
G is for corporate governance
The corporate governance component relates to the board of directors and company oversight, as well
as shareholder-friendly versus management-centric attitude. In less dry terms, ESG investors analyze
how corporate managements and boards relate to different stakeholders, how the business is run, and
whether the corporate incentives align with the business's success.
Corporate governance issues come up every year during proxy season, when most companies file their
proxy statements announcing their annual meetings. These documents cover a variety of corporate
governance topics. Shareholders vote on a variety of issues presented to them annually, such as
executive compensation ("say-on-pay"), director appointments, and shareholder proposals.
Governance topics to research and analyze include:
 Executive compensation, bonuses, and perks.
 Compensation tied to metrics that drive long-term business value, not short-term EPS growth.
 Whether executives are entitled to golden parachutes (huge bonuses upon exit).
 Diversity of the board of directors and management team.
 Board of director composition regarding independence and interlocking directorates -- which
can indicate conflicts of interest.
 Proxy access.
 Whether a company has a classified board of directors.
 Whether chairman and CEO roles are separate.
 Majority vs. plurality voting for directors.
 Dual- or multiple-class stock structures.
 Transparency in communicating with shareholders, and history of lawsuits brought by
shareholders.
 Relationship and history with the U.S. Securities and Exchange Commission (SEC) and other
regulatory bodies.
Intuit (NASDAQ:INTU) satisfies many of the attributes in the corporate governance category. It has
achieved a 40% diverse board, one of the highest levels in corporate America today.
Strong management teams and boards have a significant amount of "skin in the game," meaning they
own shares of the stock they're steering and a personal incentive to make the company perform well.
Intuit displays this with strong stock ownership guidelines that dictate Intuit's CEO must hold stock
worth 10 times their annual salary, and non-employee directors must hold the equivalent of 10 times
their annual cash retainers. Intuit shows accountability by tying its executives' incentive compensation
to revenue and non-GAAP (Generally Accepted Accounting Principles) operating income, as well as
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to the company's overall performance on annual goals related to employees, customers, partners, and
stockholders.
Many corporate governance details are found in the sustainability reports, but interested investors
should also read the annual proxy statements they receive from companies they own shares of. To
research corporate governance attributes (including interesting tidbits such as CEO pay) before
buying a stock, you can access proxy statements on the SEC's website by searching for the filing type
DEF 14A.
The history of ESG investing

Over the course of decades, many management teams and investors have adhered to
the shareholder value theory, which was popularized in 1970 by Milton Friedman (and is also
known as the Friedman Doctrine). Friedman argued that companies' only social responsibility
is to maximize shareholder value, in effect to make money for the folks holding the stock.
Proponents of shareholder value maximization put the pursuit of profit (and shareholder
returns) above all other considerations. Pursuing profit isn't inherently dangerous -- after all,
lack of profits can lead to a host of bad outcomes for companies including bankruptcy. But
many businesses can run into serious problems if management is only concerned with
maximizing short-term profit measures to please Wall Street, at the expense of all other
stakeholders. Companies that chase the approval of the markets instead of building
relationships with employees can end up making workers more likely to unionize or quit.
And when this toxic philosophy pervades a company's culture, it's more likely that employees
will make the poor decision to engage in dangerous, risky, or even illegal dealings to appease
management's demands for short-term profit. Ultimately, obsessing over EPS and other short-
term metrics is a good way for companies to open themselves up to lawsuits, investigations,
and regulations.
Enter: Socially responsible investing (SRI), which relies on strategies that emphasize
sustainable, responsible and impact investing. SRI sprung from a niche investment strategy
that emerged in the 1960s and '70s, around the same time as Friedman's statement. Some
consider the Quakers' earlier exclusion of "sinful" companies as the significant root of this
philosophy, but many other observers point to South Africa's apartheid period as a crucial
tipping point, when investors began divesting from companies that did business there based
on moral and ethical grounds.
For decades, shareholder value theory has been protected by the hefty returns enjoyed by
investors, but modern investors are increasingly realizing that shortchanging stakeholders to
juice shareholder returns is too high a price for society to pay. A company's stakeholders go
way beyond shareholders to include its employees, customers, suppliers, distributors,
communities, neighbors, and the environment. And in an ironic twist of the shareholder value
theory -- shoddy treatment of stakeholders presents financial risk, as shareholders have the
power to damage the company by selling their shares. This collective realization helps
explain why SRI and other ethically focused investing techniques have grown in popularity
and coverage.
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 Objective
 The overall internship objective was to help the client earn superior, long-term
investment returns. The internship objective can be explained as follows:
 Understanding Key ESG issues - We carefully examine certain ESG criteria across
environmental, social and governance issues.
 Materiality - We evaluate the materiality of the issue to the industry and company.
While we primarily do our own research, we utilize ESG specialist research sources to
help supplement our research.
 Understand Impact - We seek to understand the long term impact of various ESG
issues to take a more informed, holistic view of the company’s business operations, its
industry dynamics and its long term business strategy. This includes looking at risks
and opportunities.
 Connect to Financial Valuation - Our objective is to identify whether and where an
ESG issue has the potential to affect the financial valuation of our forecast. The
relationship and connection is part of integrated analysis.
 Thematic - We examine and invest in long term themes that may take many years to
fully surface.
 Connect to Portfolio Decision - A portfolio decision to include or exclude a stock
based on financial evaluation along with ESG related issues is made by the
investment team.

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 METHODOLOGY
A. Data Source(s).
To assess companies’ exposure to and management of ESG risks and opportunities,
we collect data from the following sources:
 Macro data at segment or geographic level from academic, government, NGO
datasets (e.g. Transparency International, US EPA, World Bank)
 Company disclosure (10-K, sustainability report, proxy report, AGM results, etc.)
 Government databases, 1600+ media, NGO, other stakeholder sources regarding
specific companies

B. Entering the relevant information in the software.

C. Cross-checking the entered data.

D. Submitting the task for review.

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 LEARNING OUTCOME

Investment strategies related to ESG

SRI generally uses exclusionary screens, or filters, that investors can use to exclude certain companies
and industries that don't meet their particular value criteria. The SRI investor sets their screen to make
an investment decision by tailoring it to their own values. For example, many SRI investors screen out
tobacco, alcohol, and weapons stocks, leaving most other companies and industries eligible to select
for further analysis. Others take issue with lobbying done by certain companies, and keep them out of
their consideration pool for that reason. SRI investors might also screen out all companies in a
particular industry except those considered "best in class." A best-in-class investor might screen out
all fossil fuel companies except those that outperform their peers in the areas of sustainability,
employee treatment, and corporate governance.
Shareholder activism is another form of SRI investing, in which investors buy shares of companies
that other SRI investors find unpalatable or reprehensible, with the expressed purpose of engaging
with those companies to encourage, or demand, improvement. Engagement tactics include filing
shareholder proposals, attending annual meetings, and speaking directly with executives. This strategy
isn't necessarily about making money or being long-term buy-and-hold investors. Usually, these
shareholders sell their shares after companies adequately engage with them on reform by addressing
the targeted issues or even fully meeting their demands.
Unfortunately, not all activist investors are socially responsible. The other type of shareholder activist
typically buys large stakes in companies to influence management, but they hail from the shareholder
profit camp, pushing for short-term profit boosts that can damage long-term strategic initiatives. It
only works because of the massive amount of money they sank into the company, so becoming an
activist investor isn't an option for most individual investors anyway. But it's worth knowing about
these deep-pocketed vultures, so you can raise a red flag if one of your investments gets targeted by
one.
Impact investing is another philosophy under the SRI umbrella. Impact investors put their money in
companies that have demonstrably positive environmental and social impacts, on top of positive
financial returns. Impact investors have differing expectations when it comes to financial returns.
While some target below-market-rate returns, others expect results that are comparable or even beat
the market, according to the Global Impact Investing Network. An impact investor may make an
investment where the measurable outcome relates to a highly impactful area, such as boosting
sustainable agriculture. Therefore, a financial outcome that matches or beats the return of the S&P
500 isn't what they measure to gauge success. Rather, they aim to see progress in their desired area,
by tracking the indicative metrics they identified before buying the stock.
Conscious capitalism is another buzzword you've probably heard. It's a business management strategy
that emphasizes aligning the business with stakeholders for shared success. A company that fits within
that realm not only seeks profits to benefit shareholders, but also serves other stakeholders like
employees, the environment, suppliers, customers, and communities. Serving all stakeholders is
thought to strengthen a business and generate long-term profitability. The focus on creating value for
stakeholders puts conscious capitalism in the same philosophical category as SRI or ESG, but it's
better understood as something that should be embodied by an executive. Investors can look to

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conscious capitalism as a way to think about management of the companies they own, but it's not an
investing discipline per se.
How ESG investing is different
ESG is most like SRI in that it focuses on investing in publicly traded companies. However, ESG
investors actively opt in to companies because of impressive environmental, social, and governance
attributes they've demonstrated. Conversely, a traditional SRI investor focuses on excluding certain
industries or companies because they have failed in certain aspects. ESG can be confusing for folks
who are more familiar with the straightforward SRI approach. But just remember that with SRI, your
beliefs demand you outright exclude whatever sectors you loathe, whether that's tobacco, alcohol,
weapons, gambling, or other sin stocks. ESG offers more flexibility and depth of research into the
nuts, bolts, and fine details that make up a comprehensive corporate initiative and define
management's patterns.
Sometimes, ESG homes in on companies' material issues, which depend on their industry. SASB
designed a Materiality Map to illustrate what defines financially material issues -- things that are
"reasonably likely to impact the financial condition or operating performance of a company and
therefore are most important to investors."
An issue that's financially material for one industry may not be material for another. It's fabulous
when companies donate money to noble causes, but charitable giving doesn't typically impact
operations beyond good PR and brand enhancement. For ESG investors, charitable giving is not
usually a financially material aspect to consider. But climate change, along with its causes and effects,
is a financially material issue, as global warming will substantially impact every company
everywhere. Data security is of utmost importance to internet companies and retailers, but less
material for infrastructure companies. SASB's Materiality Map offers tips on how to navigate these
differences.
Just because an issue isn't financially material to a company doesn't mean it doesn't matter to
investors. There will be occasions when a socially responsible investor will buy or sell on the grounds
that it's the right thing to do, regardless of the issue's direct financial impact.
ESG can yield interesting results that may not always feel comfortable, especially to traditional
socially responsible investors, due to its novel combination of an inclusionary criteria and financial
materiality clause.
A distasteful industry can yield a high-ESG company. For example, a defense company that
specializes in missile production and scores high on environmental sustainability, employee treatment,
corporate governance, and diversity may merit inclusion in an ESG fund, even though it would be a
"no-fly zone" stock for a traditional SRI investor.
Some ESG investors do screen out entire industries, excluding certain companies no matter how high
they rank in ESG areas. Bear in mind that throughout the financial industry, ESG is used in different
ways, and there are no official standards yet. This is one reason you may occasionally see news
articles arguing that some purported "socially responsible" products actually aren't.
If you're not a self-directed investor, it's important to do your homework on the methods your money
manager uses, and whether they screen out certain industries. Otherwise, you may find a company
from an industry you don't feel good about in your portfolio.
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When rationalizing ESG investing with the greater SRI industry, it's important to remember that ESG
is also a stakeholder-centric theory, which argues how companies treat all their stakeholders will
impact their long-term success or failure.
How ESG investing can reduce risk
Beyond its ability to help uncover attractive long-term investment opportunities, ESG has experienced
a great deal of traction within the financial world thanks to its role in reducing risk. Stakeholder
treatment issues including climate change and resource scarcity pose serious risks to all companies'
operations and profits. To see how integrating ESG can help investors mitigate risk, here are few
examples of risky corporate behavior where employing ESG could have helped.
Environmental risks go further than the usual regulatory and reputational risks. Environmental
challenges cause a variety of issues and global warming is on track to devastate entire economies if
it's not mitigated or reversed. Other implications of climate change are resource scarcity, more
frequent natural disasters of greater magnitude, and increased global poverty, as well as political
unrest, instability, and even war.
In a recent worst-case scenario, PG&E (NYSE:PCG) became the first company to suffer a hefty blow
partly due to climate change-induced conditions that caused enormous wildfires. PG&E declared
bankruptcy, an extreme outcome that is likely to become more common if companies don't adequately
prepare for risks related to climate change -- or better yet, actively work and invest to improve the
outlook of global warming.
What about worker treatment? It stands to reason that unhappy, unhealthy, or stressed employees
won't be eager brand ambassadors, willing to provide excellent customer service, or dream up
innovative new ideas for the company. They're also more likely to quit their jobs, leading to high
employee turnover that forces the company to spend more money on hiring, training, and onboarding
new employees. Research shows treating employees well -- and keeping them engaged with their
work -- helps business operations. Companies that excel at engaging their employees achieve per-
share earnings growth more than four times higher than rivals, according to Gallup. Compared with
the companies in the bottom quartile, those in the top quartile when it comes to engagement generate
higher customer engagement, higher productivity, better retention, fewer accidents, and 21% higher
profitability.
Diversity pays, too. Companies with low levels of gender, racial, and other forms of diversity across
workforces, management teams, and boardrooms lose out on intellectual capital and valuable
perspectives. Research shows that teams composed of the exact same types of people make worse
decisions and fare worse financially, too. In 2018, McKinsey examined data from 366 public
companies in the U.S., Canada, Latin America, and the U.K. and found companies in the top quartile
for gender, racial, or ethnic diversity are more likely to generate financial returns above the national
medians for their industry. The converse was also true. McKinsey concluded that "diversity is
probably a competitive differentiator that shifts market share toward more diverse companies over
time."
High ESG, high returns
Risk reduction is important, but many more people are coming around to the notion that strong ESG
traits can be viewed as indicators of companies with exemplary management teams. After all, concern
about ESG factors goes hand in hand with long-term thinking, and the ability to consider far-out
outcomes demonstrates a clear vision. Strategizing and planning decades in the future is a necessary
shift in the business world, where too many CEOs chase short-term, quarterly profits. Thinking about
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how a business impacts various stakeholders requires a level of holistic, creative thinking that
shouldn't be underestimated as a competitive advantage.
Former PepsiCo (NASDAQ:PEP) CEO Indra Nooyi sagely envisioned that trends would shift to
healthier offerings (and unhealthy snacks and drinks contribute to public health risks, too, a factor that
would be significant to ESG investors), and so she began dedicating research and development
spending to devise healthier treats that appeal to consumers.
Integrating ESG into business operations allows executives to better manage complexity, too. Just
think of how difficult it is to change the operations of a massive, legacy business -- and plenty of
executive management teams are doing it. In one encouraging sign, 85% of S&P 500 companies now
publish detailed sustainability reports outlining their efforts, up from 20% in 2011.
Plenty of data backs up the notion that high-ESG companies are also well-run, ultimately producing
financial results comparable or superior to their low-ESG peers. Fortune cited data from asset
management start-up Arabesque that found that S&P 500 companies in the top quintile in terms of
ESG attributes outperformed those in the bottom quintile by more than 25 percentage points between
the beginning of 2014 and the end of 2018. The high-ESG companies' stock prices were also less
volatile.
Consider this conclusion from The Journal of Applied Corporate Finance by Dan Hanson and Rohan
Dhanuka:
In recent years a wide literature of academics and practitioners has been developed which supports the
proposition that high ESG characteristics are associated with lower costs of capital and higher quality
profitability including high [return on invested capital]. Several meta studies illustrate the "do well by
doing good" premise that corporate responsibility as proxied for by ESG is consistent with stronger
firm performance. As we observe across these multiple studies, there seems to be clear evidence that
companies with high non-financial indicators of quality seem to perform significantly better on
market and accounting-based metrics.
Stunning growth in ESG
Ethical investing has come a long way since SRI was a small niche in the investing universe. SRI,
ESG, and impact investing used to not even exist, and now they're catching on with both financial
institutions and everyday investors, all of whom are seeking to do good with their investing dollars
while doing well for themselves.
According to US SIF's 2018 Report on Sustainable, Responsible, and Impact Investing Trends, total
SRI assets jumped 38% to $12 trillion since 2016 in the U.S. alone. These assets represent 26% of the
total U.S. assets under management ($1 in $4). For perspective, when US SIF first measured the size
of the market in 1995, it was $639 billion; the area has increased 18-fold, and has since enjoyed a
compound annual growth rate of 13.6%.
There are a variety of reasons why this style of investing is becoming more mainstream. A frequently
cited reason is that millennials consistently show a tendency to crave social responsibility, whether it's
in the products they purchase, the organizations they work for, or their investment portfolios.
This activist attitude has been reshaping many aspects of how business works in our society, including
companies' increasing willingness to incorporate ESG strategies into their business models and taking
public stands on issues that were once considered too controversial. Why? Millennials are a massive
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generation, comprised of at least 71 million individuals who were born between 1981 and 1996 in
America alone. Millennials represent $600 billion in annual spending in the U.S., a figure expected to
grow to $1.4 trillion annually by 2020, according to Accenture.
Baby boomers -- another huge demographic -- are poised to pass their money down to future
generations, with an unprecedented $30 trillion expected to come under new stewardship over the
course of the next several decades.
Big financial institutions haven't missed this detail about a key demographic. Morgan Stanley's
Institute for Sustainable Investing conducted many studies and surveys related to the link between
millennials and sustainable investing. In 2017, its survey of active individual investors revealed that
(emphasis original) "86% of Millennials are interested in sustainable investing, or investing in
companies or funds that aim to generate market-rate financial returns, while pursuing positive social
and/or environmental impact. Millennials are twice as likely as the overall investor population to
invest in companies targeting social or environmental goals. And 90% of them say they want
sustainable investing as an option within their 401(k) plans." Bank of America Merrill Lynch
predicted that in the next 20 to 30 years, millennials could pour between $15 trillion and $20 trillion
into ESG investments in the U.S.
Risks of ESG investing
Every investing strategy has risks, and ESG is no different. Let's go through a few potential pitfalls of
this approach and how you can avoid them.
One of the major ongoing risks is the lack of standards in the fledgling industry. While this opens the
playing field for many interesting approaches to doing good while generating a solid investment
performance, it also increases the possibility that some ESG investment firms will exploit this area for
marketing, rather than employing disciplined ESG investment strategies.
The growing ranks of ESG investors as well as huge financial institutions moving into the ESG arena
is a validating sign. There's added potential for better data on ESG performance, but that data may
show that individual ESG investors aren't the rockstars we'd hoped them to be over the long
term. Headlines from new research studying more ESG investors may tout that "ESG doesn't work" --
which may be true, for some investors. After all, not everyone is a great analyst or stock picker
(across all investments, not just ESG). Fortunately, younger people don't mind underperformance to
the same degree as older folks. Surveys of millennials consistently show they accept lower
performance in order to invest in highly sustainable companies. So even if millennials underperform,
they're sleeping better at night.
Younger people are moving into investment firms to perform research and analysis, and it's
reasonable to assume many will hone in on ESG. Most millennials have yet to weather a major
economic downturn before and so their investment strategy remains untested. In the event that we see
a recession, ESG-related sectors could take a significant hit -- especially if younger investors bail on
their ESG investment theses under pressure.
Another risk is if companies were to abandon their attempts to become more stakeholder-centric, and
stop reporting sustainability data. Any broader move away from enhancing ESG attributes would
make it hard for ESG investors to find high ESG companies to invest in.

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References

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from https://www.fool.com/investing/2019/04/03/what-is-esg-investing.aspx

Sisco, D. W., & USS Nimitz Public Affairs. (2012, July 19). #GreatGreenFleet: USS Chafee
Takes On Biofuel. Retrieved June 9, 2019, from
https://www.navy.mil/submit/display.asp?story_id=68460

Powell, R. (2018, June 13). ESG funds: What you need to know about socially responsible
investing. Retrieved June 9, 2019, from
https://www.usatoday.com/story/money/columnist/powell/2018/06/13/what-know-esg-funds-
sustainable-investing/679153002/

Financial Times Home. (n.d.). Retrieved June 9, 2019, from

http://lexicon.ft.com/Term?term=ESG

Naylor Association Management Software. (n.d.). Retrieved June 9, 2019, from

https://www.ussif.org/sribasics

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