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What I Care About This Week | 2022 Sep 6

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by Franklin J. Parker, CFA

The Summary

The Details

Investing with a mind toward ESG (environmental, social, and governance factors) has grown in both popularity and assets over the past decade. The Economist recently ran an entire special report on the topic, and there is more to unpack than we have space for. Even so, let’s look at it very briefly.

First, what is it? ESG investing involves looking at companies not just through the lens of risk and return, but also with a mind to their impact on the environment, their impact on the communities in which they operate (social concerns), as well as their overall governance, or any other non-financial factors an investor may be concerned with.

Unfortunately, the financial industry has taken the same tack they always have when it comes to this important topic: they have built products and have expected investors to buy them.

But ESG investing, along with its cousins impact investing and ethical investing, are all very personal endeavors. In my experience, every investor has a different take on exactly what this kind of investing means to them. Also overlooked by the industry as a whole: investors are often required to make tradeoffs when the E, S, and G might be in conflict. Tesla, for example, might be a net positive for the environment (the E in ESG), but its treatment of employees and its dictatorial governance structure generally give it low scores in the social and governance components (the S and G in ESG). An investor, then, must weigh the personal importance of each of those scores and decide whether such a company fits in their personal ESG mandate. Some may decide it fits, while others may decide it does not.

And that is the critical point: an ESG investing mandate is both important and very personal. There is no one-size-fits-all, so investors need an advisor who can talk through these important issues and implement individualized solutions.

This is an area we would be eager to help you navigate.

Chart of the Week

The Wall Street Journal reported a slight uptick in the defaults on low-credit-quality bonds this month. While it is a small corner of the market, there is worry that it may begin to spread as interest rates rise and profits come under pressure.

Delinquency rates on commercial loans is a metric that I follow closely. Typically, leading into a recession, delinquency rates start to rise. We haven’t seen a significant uptick on delinquency rates just yet, though this figure only posts quarterly (and the last data we have is from the first quarter of this year). If delinquency rates do begin to rise meaningfully, investors should grow more cautious.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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