4/20/2023 Phoenix, AZ—Making investment decisions by focusing on issues beyond balance sheets, income statements, and other measurable metrics has become a major issue in the finance world. However, the ESG (Environmental, Social, and Governance) movement aims to incorporate other key factors.

Those who favor using ESG factors as part of the investment decision-making process argue that it produces better investment returns over time, as companies with higher ESG scores have superior investment returns.

On the other hand, those who cast a skeptical eye on ESG measures are focused on the traditional metrics of a balance sheet, income statements, and absolute and relative valuation to determine if the stock or bonds of a particular company represent an attractive investment opportunity.

ESG 101: How It Works
Incorporating ESG into the investment decision-making process is a recent phenomenon. Traditionally, financial professionals will evaluate a potential investment based on financial analysis, relative valuation, and estimates of the entity's future growth.

The philosophy behind ESG is based on the belief that choosing investments/companies with higher ESG scores will produce superior investment returns in the long run. However, because ESG investing is still relatively new, measuring these factors and assigning scores to different companies remains debatable.

Moreover, the process becomes even more difficult as determining an ESG score for a particular company is subjective. Therefore, the ability to quantify most ESG measures is complex and fraught with pitfalls.

"One of the risks of using ESG factors in the investment selection process is that management takes their eye off the ball, and the company’s fortunes suffer as a result," said Sterling Russell, CFA at Trajan Wealth, LLC.

To illustrate the difficulty of establishing an ESG score for a given company, look no further than the following example: Silicon Valley Bank (SVB) and FTX had higher ESG scores than most companies in the S&P 500 when they failed.

What The Future May Hold for ESG
Based on broad support for using ESG factors in decision-making, it is likely here to stay. However, ESG factors will likely evolve over time as more data becomes available.

In the interim, a continued focus on fundamental analysis —balance sheets, income statements, relative valuations, and projections of future performance—will dominate the investment process.

Warren Buffett—the Oracle of Omaha—was recently asked if Berkshire Hathaway used ESG in their investment decision-making process, and the answer was an emphatic "No."

"We believe investors should continue to focus on what has worked in the past and what we expect will work in the future," continued Russell. "However, we are open to change as the process becomes more refined, measures become quantifiable, and evidence of superior returns for applying ESG factors becomes evident."

About Trajan Wealth
Trajan Wealth, LLC, formed in 2012, was founded by CEO Jeff Junior. Before his 20+ years in the financial services profession, Jeff Junior was a United States Marine Corps member. Jeff continues to serve his clients and employees with the utmost service, respect, and attention to detail. The firm has multiple locations in Arizona, Texas, and Utah. In addition, Trajan Wealth is expanding to the Atlanta area in the coming months.

By using low-cost, diversified portfolios under its fiduciary standard—and working closely with its investment advisors and estate attorneys who work within one office—the company provides long-term support for its clients’ retirement needs and their estate plans. This includes strategies for wealth accumulation and tax planning.

For more information on all the different services offered or to schedule a complimentary consultation, visit https://trajanwealth.com or call 1-800-838-3079.

Disclaimer:
* Advisory services offered through Trajan® Wealth L.L.C., an SEC registered investment advisor. Legal services are offered through ​Trajan® Estate, L.L.C. ​in Arizona and Utah, and independent law firms in other states.