Many of us may have heard of one of the latest trends in investing – ESG. But what is ESG? Is it beneficial to your portfolio returns? This article will answer these questions from my perspective as the HIG 2022 Summer Intern. But first, what does it mean?

ESG stands for three different elements of a company’s operations:

• Environmental (factors affecting the climate and natural habitat)
• Social (factors affecting stakeholders like employees, suppliers, shareholders, and the society they operate in)
• Governance (the National and International regulators of the business)

ESG is essential to know about today because investors have increasingly started to apply certain non-financial factors when evaluating companies for investment. 

ESG ratings attempt to assign a quantifiable value to a company depending on the impact the company has with respect to any of these three factors. Often measured on a scale of -100 to +100 – a positive score is intended to indicate a favorable impact, and a negative score is intended to indicate a potential risk in these areas.

For example, within the ESG matrix’s social governance sector, a company may be given a positive value for increasing diversity hiring in their workforce and assigned a negative value for having no/low female representation in their upper management. In the ESG thinking, sub-par Human Resource policies could lead to potential future lawsuits, theoretically reducing the company’s future expected return and share price. 

An issue with these ratings is that things can get confusing quickly. Consider, what happens if Company X scores low on the social scale due to a lack of diversity hiring but performs high in the environmental segment by lowering carbon emissions. Let’s say that Company X comes out with an excellent overall ESG score. With a high ESG score on paper, investors might invest in this “good” company, not knowing that it is scoring high in Environmental but low in Social. In my opinion, investors can be easily confused by high ESG scores, investing while blind to unhighlighted risks. 

Additional questions arise about investing in an ESG strategy because there is no standard way of calculating ESG scores. There are numerous rating agencies (MSCI, Sustainalytics, RepRisk, ISS, etc.) that assign ESG ratings to companies. Each of these agencies has a different formula and factor input data and related variables differently to arrive at their score. This means that companies on different rating scales cannot be compared with one another.

So how, as an investor, can you navigate the world of ESG investing?

Ratios like EPS (earnings per share) and EBITDA (earnings before interest, taxes, depreciation) are standardized. These measures are easy to calculate and to use when comparing companies. By contrast, ESG ratios are often opaque and time-consuming to calculate, and therefore, more expensive to apply. This can result in ESG Funds being comparatively expensive to most Index funds without any indication of higher overall performance. ESG funds, because they can remove entire segments of the market – for example, fossil fuels – are often less diversified than most index funds leading to a greater concentration of risk. This could lead to lower returns and higher volatility for the investor.

Because ESG is still a relatively new concept, relatively few funds in this segment have a track record of 20 years or more to judge them accurately. So, the question remains – what do investors do If they want healthy returns but still wish to help society? They may be hard-pressed to choose one over the other and feel they must compromise on either returns or activism.

For some investors, investing to create change brings them happiness and satisfaction rather than maximizing their investment returns. ESG investing may be perfect for them. However, investors hoping to meet or exceed market returns may be disappointed.

One compromise that may leave them satisfied would be to invest in a diversified manner and use some of their income or investment returns to donate directly to specific causes or charities where they want to make a difference. This could also lead to tax benefits for the investor through using a Donor Advised fund, and the potential for higher expected returns through lower investment costs.

Another option is to support society through non-monetary means like raising awareness through volunteer work, changing individual consumption, or directly supporting activists who champion change by joining their work and helping out in their agendas.

I hope that I have provided a better understanding and more clarity on ESG practices so that you can choose the investment philosophy that best suits you!

Please feel free to call us or book an appointment if you would like to further discuss this topic.

We have a long history of outstanding summer interns and this year’s selection is no exception. Samridhi Sureka joined us in June from Washington Univerisity’s MBA program. What’s Samridhi working on while at HIG?  She’s been in a rotational internship program with us where she gets to explore all the elements of the business, from investments and finance to compliance, marketing, and other departments.

Originally from Nagpur, India, where Samridhi spends time helping her family run a sustainable packaging solutions business, she has a talent for supporting large-scale operations and logistics with interest in financial management.

On a personal note, Samridhi loves to cook, and her mission while in St. Louis is to find the best farmers’ market where she can source exceptional ingredients and spices (the hotter, the better) that remind her of home. 

We are lucky to have her with us this summer and have enjoyed adding a fresh perspective to HIG.

*Shout out to the great Spencer Burke at Saint Louis Trust and Washington University for connecting us to Samridhi!

If you have children, you have likely added the number, “529” to the list of ubiquitous IRS regulation codes that you know. You might even randomly discuss this IRS code with other parents while watching youth soccer games. While most of the articles on 529s focus on how and where to open accounts, little attention is given to optimizing, accessing, and using the funds. We want to remedy this by sharing some key considerations:

Which Educational Expenses Can be Paid From Your 529?

529 funds can only be used for “qualified” educational expenses. If your student is attending K-12 secondary school, account owners are permitted to use up to $10,000 per year for tuition only. However, once your student heads off to college, the list of qualified expenses expand significantly, including tuition/fees, housing, meal plans, and technology. If your student is fortunate enough to earn scholarships, that can help the funds in your 529 go even further.

What Are “Non-Qualified” Costs?

It’s important to note that many college costs are non-qualified, meaning the account owner cannot use 529 funds to satisfy those expenses. The following are some non-qualified expenses include:

• College application and testing fees
• Travel and transportation costs
• Extracurricular costs like fraternity and sorority dues
• Everyday living expenses

How to Withdraw and Use the 529 Funds

Since it is the account owner’s responsibility to prove that 529 withdrawals are used only for qualified expenses, proper record-keeping is critical. For those larger items such as tuition/fees, housing, and meal plans, it is usually possible to direct your 529 plan to remit payment directly to the school’s finance department which ensures a clean record of withdrawal and usage. If the account owner withdraws funds to the beneficiary (your student), maintain pristine records, such as receipts, for purchases so that there is an audit trail.

Importantly, the academic calendar is different than the annual calendar. Funds withdrawn in one calendar year should be used in that calendar year. Be sure to understand each school’s financial deadlines and plan accordingly. In all cases, make sure the fund manager has at least 10 business days to process a withdrawal request.

Finally, some students have 529 accounts that are owned by their grandparents. If the student is applying for or has accepted financial aid, there are strategies to minimize or eliminate the potential negative impact of withdrawals from the grandparent-owned account.

What if You Need More Funds or Run Out?

One of the great features of 529 accounts is you can roll over funds between the accounts of all your children. If you have three children and three funds, you can rest easy that even if you fund them equally, you can address the fact that all three will have different college expenses. Or, if one student ends up not needing any of their funds, you can change the beneficiary to one of their siblings. If you are in the enviable position that there is money left over, then you have a start on graduate school or an initial contribution for their future children.

Conclusion: When the Time Comes, Learn the Withdrawal Rules

Keeping up with all the college bills can be a challenge. If you take the time to learn the withdrawal rules and processes for your 529 plan before your student heads off to school, you can eliminate the headaches that can be part of paying for all the expenses related to sending your kid to college.  You’ll have peace of mind as well as the time to enjoy your student’s new adventure and future successes. As always, you can reach out to our team with any questions.