ESG Investing Resources

Resources for the Values-Based Investor

OpenInvest is dedicated to helping investors make a difference where it matters most. ESG investing is one framework that helps achieve this goal. Read on to learn more.
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Getting familiar with ESG

What is ESG investing?

ESG investing is a framework for evaluating a portfolio beyond the scope of financial return. It generally considers three aspects of an investment: Environmental impact, social impact, and corporate governance (ESG). At OpenInvest, we use the terms ESG investing and "values-based investing" interchangeably. Our technology aligns portfolios with the Causes that matter most to investors – such as Reducing Greenhouse Gas Emissions, Racial Justice, Supporting Women Leaders, Fighting Deforestation, and many more. Each OpenInvest Cause is powered by industry-leading data and adheres to a strict methodology to keep investments aligned with personal values, all without sacrificing financial goals.

How does ESG investing work at OpenInvest?

At OpenInvest, ESG investing is made possible by our Dynamic Custom Indexing (DCI) technology. DCI bypasses funds and instead purchases the underlying stocks directly, automatically overweighting or divesting from particular stocks depending on the selected Causes.
Whenever a new Cause is added or removed, OpenInvest’s algorithms automatically  rebalance  the portfolio to maintain tracking of the benchmark. For instance, if the Invest in Racial Justice Cause is selected, our technology overweights companies with a positive impact, re-weights neutral companies, and removes companies that do not align with the Cause. The end result is a portfolio aligned with personal values, all without sacrificing financial goals.
Sustainable Investing
Sustainable investing is a forward-looking approach that encompasses environmental, social and governance (ESG) factors. It aims to deliver long-term sustainable financial return in a fast-changing world. We believe ESG factors will increasingly affect the ability of companies to operate and generate returns, today and over the long term. ESG factors also represent opportunities that investors can capture as companies innovate to build a sustainable future.
Socially Responsible Investing (SRI)
Socially Responsible Investing (SRI) is a sustainable investing strategy similar to ESG but generally focuses on exclusion only, while ESG investing involves both inclusionary and exclusionary measures. The particular methodology depends on the institution, and often the terms are used interchangeably.
Index Fund
An index fund is a portfolio of stocks and bonds designed to mimic the risk and return of a particular market index, for instance the S&P 500. Though convenient and stable, index funds are rigid and unable to be customized, often containing companies that do not align with the investor’s values.
Separately Managed Account (SMA)
An SMA is a highly-customizable portfolio constructed of individual securities and powered by direct indexing technology. With SMAs, investors benefit from direct ownership of stocks and can participate in proxy voting.
Direct Indexing
Direct indexing is the direct purchasing of underlying stocks in an index, rather than through a fund. Learn more here.
Dynamic Custom Indexing
Dynamic Custom Indexing (DCI) is OpenInvest’s proprietary technology that powers our ESG portfolios. DCI functions like direct indexing and replicates the market by purchasing the underlying stocks directly. Our algorithms then remove companies based on the selected Causes, and dynamically rebalance the portfolio to maintain the benchmark. The end result is a way to invest in your values without sacrificing financial goals.
Divestment is a key part of ESG investing. OpenInvest’s technology automatically divests your portfolio from companies that don't align with your selected Causes. Outside of each Cause, you have the freedom to remove any security from the portfolio you desire.
ESG Scoring Methodology
Each OpenInvest Cause is built from a set of indicators that result in an overall positive, neutral, or negative score for the portfolio. These indicators are constantly updated and backed by data from a variety of sources, ranging from market data aggregators such as Refinitiv, Asset4, and QADirect, to highly specific academic or industry research such as UMass Political Economy Research Institute, or the Global Canopy Initiative’s Forest 500 ratings.. More ›
ESG Scoring Methodology cont'd
To give an example, the indicators for Invest in Women Leaders include the percentage of women on the company’s board and executive team and the percentage of female managers. OpenInvest scores companies with significantly below average metrics as negative, around average as neutral, and significantly above average as positive. The specific methodology varies across Causes and is available through Impact Reports.
Tracking Error (TE)
Tracking error (TE) is the difference in returns between a portfolio and its benchmark. Tracking error is commonly used to determine how well a portfolio is performing, and is calculated as the standard deviation of the difference in returns of the portfolio and the benchmark over time.
Sustainability Reporting
For each Cause, OpenInvest generates sustainability reports that demonstrate the proportion of positively- and negatively-scored holdings for the portfolio and converts performance into relatable, tangible insights – such as trees planted or miles avoided.

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Debunking common ESG myths

Myth #1: ESG investing hurts financial returns

This myth is one of the most pervasive when it comes to ESG. However, sustainable investing does not require a performance tradeoff. Research shows that incorporating ESG factors can enhance a portfolio’s returns by reducing volatility and providing protection in bear markets (Exhibit 1). Think of it this way: Embedding ESG analysis leads to more complete and robust data to analyze companies, and more data can lead to better-informed investment decisions and, potentially, stronger risk-adjusted returns. In that sense, sustainable investing can help lead to value creation.
Chart showing above-average investment performance and lower than average volatility for ESG leaders
Portfolios composed of companies with high ESG scores have systematically outperformed portfolios of companies without disclosure practices and sustainability reporting. Additionally, in the first quarter of 2020, Morningstar reported that 24 out of the 26 ESG index funds the firm tracks outperformed their closest conventional counterparts.*
*Past performance is never a guarantee of future results. Some sustainable investing strategies may prioritize sustainable objectives over investment returns.

Myth #2: Only millennials and women are interested in ESG

This is another common misconception. In fact, 85% of the general population has an interest in sustainable investing. While we like to talk a lot about millennials driving that interest forward — and they certainly have played a significant role in its trajectory — it’s actually baby boomers and Gen X who are the current drivers of ESG investing. According to The Fifth Annual Responsible Investing Survey, 39% of Gen X, 24% of baby boomers, and 22% of millennials asked about sustainable investing in 2019. Even if millennials are the most interested generation, older generations are more likely to act on that interest.

While women have historically been more likely to factor sustainable investing into their investment decisions, that gap has all but closed recently, according to Morgan Stanley. The gap between men and women has dropped from a difference of seventeen percentage points in 2017 to only three percentage points in 2019.

Investors from all generations and genders have an interest in ESG investing. As we continue to see the rise in ESG interest from the general population, we can no longer assume that this interest comes only from younger generations or women. Everyone’s motivations for investing are different.

Myth #3: Sustainable investing is just a trend

ESG investing has historically been a niche investment strategy. Advertised often as a specialty product rather than a service, it’s no surprise that some see ESG as a fad or trend with very little long-term future. Instead, what we are seeing is a shift in the investment landscape. The link between sustainability and financial services is far more connected than ever. According to PwC, that boundary between traditional and sustainable investments will all but disappear by 2022.

This shift is the result of many factors including: Demand for greater personalization and customization in the market, advances in cost structures and technology, increasing regulatory momentum and pressure ESG’s demonstrated outperformance in the market, and escalating environmental, social, and health crises creating pressure for needed change.

As we navigate this post-fund future with the rise of direct indexing, this moves financial services towards greater customization and flexibility — resulting in the integration of ESG as a feature of your offering instead of a niche or specialty product.
The US SIF’s 2020 Trend Report outlines how we’ve seen a 42% increase since 2018 in investors considering ESG factors. That’s $17.1 trillion at the start of 2020 compared to $12.0 trillion at the beginning of 2018. Today, close to one in three dollars of US-domiciled assets under management are using sustainable investing strategies. That number is only going to continue to grow.
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Personalizing the experience

Tangible sustainability reporting

ESG investing requires a comprehensive, engaging, and simple way to see how investments are performing.

OpenInvest simplifies a historically laborious process and takes it a step further by converting portfolio performance into tangible metrics that demonstrate relatable insights – like trees planted, dollars invested in women leaders, or miles avoided.
Graphic showing three examples of sustainable investing metrics including carbon reduction, miles avoided, and trees planted