Still, he warns that some supposedly ESG funds do not meet the standard.
Where some would-be ESG managers go wrong, Gitterman adds, is only merely weeding out the worst companies in each sector and stopping there. Using this limited selection process can lead the advisor into the wrong investments, he says.
“Even when people claim to be doing that you could find ESG funds that owned Equifax, and Equifax was the worst-rated stocks for data breach risks in every stock that’s measured,” he says.
Some so-called ESG funds have held Wells Fargo and Volkswagen, companies that have poor scores as measured by ESG data. Some ESG rating systems picked up these companies’ problems and never invested in these controversial companies. But others had these controversial companies, he notes. Some advisors put clients wanting ESG into low-carbon funds, he warns, but some of them put Exxon and Halliburton in their portfolios.
“If an advisor is attracted by the low-carbon label and presented these funds to their clients wanting ESG, the advisor is going to look like an idiot,” says Gitterman.
How does one ensure they are investing in a true ESG fund?
Gitterman says advisors must do considerable research, including talking to fund management and understanding how a would-be ESG fund analyzes data and screens companies.
They must do manager and prospectus due diligence, he says, adding that the research should be done each quarter. The advisor who wants to focus on ESG investing must be relentless, Gitterman argues.
Focusing on finding the right ESG fund, he says, is not so much about tools. “It is really about the craftsmen. You can give him or her any tools if you have the right person to analyze stocks or bonds,” he says.
Getting through this considerable process, the financial professional can begin to start looking for companies that are “doing well by doing good,” he says.
Before that, Gitterman notes, it is critical that the advisor qualifies the client as someone willing to live with this considerable portfolio review process. And that rigorous process, Gitterman cautions, requires an independent financial advisor.