Why Does An ESG Score Matter? Should It?

“If you can’t measure it, you can’t improve it.” - Peter Drucker

What is the point of an ESG score? Why should you care?

It’s a valid question and an important one.

We founded Pebble to help people “clean up” their investments. We want to make it possible for your portfolio to be as green as possible. Or, as risky. Or even, if you really wish, as brown AND risky. It’s up to you. Your portfolio should reflect your values and who you are.  

Millions of Americans have poured billions into ESG funds in recent years. In 2020 alone that added up to over $51 billion from people like you who want to know more about what they own and what sort of impact those investments have on the economy, the planet, or maybe just their local community. 

After their home, their retirement savings or investment account is the single most valuable asset most Americans own. Everyone should know more about it. 

Yes, even you.

And an ESG score is central to this vision. It is pretty simple: to paraphrase management guru Peter Drucker, if you can’t measure how green your portfolio is, how can you know how to improve it? Or even what it contains? First things first, you need to have a way to understand your finances. We think an ESG score - ideally a great ESG score! - is an essential first step. 

ESG is actually an acronym. It stands for Environment, Social and (Corporate) Governance and it refers to the three central factors measuring the sustainability and societal impact of an investment in a company or business. 

Curious to know more? Here is a good overview. Here is one on ESG investing in particular. Here is a better breakdown of the origin of the term. Here is also a good debate about some of the problems with the term and industry. 

Most importantly, it is becoming commonplace to hear that a better ESG score could be important for your personal finances. What do this mean? Why should you or anyone else care?

Here are a few examples for why an ESG rating might be worth paying attention to:

1. The first reason you might like to know what your portfolio’s ESG score is there is a simple informational component. A lot of investors have no clue how “green” (or “brown”) your investments are. This could be important to you!

Information is power and so being informed can be an absolute good. There is increasing evidence, however, that there is a connection between higher ESG scores and higher stock market performance. 

This connection could be looser than the current evidence suggests but it is something to keep in mind.

At the end of the day, the specific reason you care to know your score is a personal matter. But it is entirely possible that you simply might like to understand more about what you own. It might even help you with the “why you own an asset” aspect as well!

2. The second example might have to do with your very real concern about an industry, a trend or even just a single company.

Does your portfolio contain this asset? If it did what would it do to the overall ESG health of your portfolio? If you took it out what does that look like? If you switched it for a similar asset, another ETF (I know, another acronym) or mutual fund would things improve.

More positively, there might be a new fund or company that you want to invest in because of its strong stance on something that aligns with your values or beliefs. You might be looking to add this stock to your portfolio as a sign of support or because you think it is a great investment.

Once again, we here at Pebble take no position on why you are taking this action. We just think you should be better informed about it before you do AND be able to express your preferences in your portfolio.

3. A third example might be you want to compare and contrast competing funds or assets. Which one has a higher ESG score? And, maybe more importantly, what about a breakdown of that score?

Thanks to our partners at JUST Capital, we have a few distinct categories that breakdown an individual score into its components. You might be curious about how a fund or asset does on one particular aspect of ESG especially in comparison to its competitors.

After all, it might be one score but it stands for three distinct issues and those cover a VERY broad range of issues. You likely are interested in one aspect more than another.

Once again, this is about your personal preferences.

Now, this isn’t an exhaustive list of ESG uses either. Everyone’s finances are different as are their preferences. But these are some broad strokes that will hopefully help make some of the hype around ESG transparent and also demystify a rather confusing acronym.

Important side note: when we say a “greener” portfolio we do not necessarily mean purely more environmentally minded. It is really just shorthand for knowing more about the impact your precious savings are having. Retirement accounts and investments can often seem very alien and impersonal and that is both wrong and untrue. They are deeply personal affairs.

In the end, we are not picky about how green your portfolio is. We are passionate believers in a better planet, a better economy and a better capitalism but we fundamentally think that your portfolio should reflect your own personality.

You do you. Just keep the planet in mind while you do.