The Responsible Investor

Introduction to Ethos ESG

As an investor, have you ever wondered if there was a way to align your investment portfolio with your values? Have you wished to see whether the companies you invest in are embroiled in controversies and avoid them? Or have you questioned whether the companies represented in your portfolio are doing something to make the world a better place?

Historically, investors utilizing traditional mutual funds and exchange-traded funds could not answer any of these questions. With increased interest in sustainable and responsible investment (SRI) strategies over the past decade, more and more investors have been looking to their advisors for answers. It’s been challenging for advisors to answer these questions without the help of a third-party research provider digging deeper into portfolios to find the environmental, social, and governance (ESG) factors of each underlying company.

Although ESG investing has helped advisors and investors understand more about their investments, there are some obstacles. One of the major arguments against ESG investing is the lack of consistency among rating agencies. Over 140 different ESG rating agencies analyze companies using ESG criteria.1 Each agency uses its own unique proprietary scoring system to rate companies. This variation causes companies to have disparate ratings across various ESG metrics. One agency could rate a particular company as “good” for the environment, while another agency might rate that same company “below average.”

To combat this issue, research providers do not rely on only one rating agency for their ESG research. For instance, Ethos ESG, a startup firm based in Minneapolis, helps advisors and clients analyze portfolios using ESG metrics. Ethos ESG is unique in that they don’t rely on a singular rating agency to determine ESG scores for companies. Instead, they aggregate data from various independent sources such as SEC filings and annual reports, government agencies, and independent third parties. Once they aggregate the data for each company and fund, they normalize it and rank it on a scale of 0-100, with 100 being the best for ESG metrics.

Ethos ESG’s mission is to help investors understand the companies they engage with and the impact of their investments. Ethos ESG offers an “Impact Assessment,” which asks investors a series of questions to determine which causes are important to them. Once Ethos knows what your “Impact Persona” is, they provide impact scores on funds and companies based on the causes that you value the most. For example, if diversity, equity, and inclusion (DEI) are most important to you, Ethos will rate funds and companies using DEI as the largest determining factor when developing the impact score.

The Ethos ESG impact score is one of the tools currently available to understand ESG rankings better. As the area of responsible investing continues to grow, we hope for increased regulation and consistency in ESG rankings and transparency for investors. You can use this link to take a free questionnaire on our website to determine which values are most important to you. As financial advisors, we like to use innovative tools like Ethos ESG to help investors to accomplish their sustainable and responsible investing objectives. Click on the link below to access the questionnaire. 


Resources

1. The Impact Investor. https://theimpactinvestor.com/esg-rating-agencies/#:~:text=There%20are%20more%20than%20140,%2C%20GMO%20ESGI%2C%20and%20Maplecroft

The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.