The Difference Between Value- and Values-Based Investing

Experienced advisors and investors are learning something about environmental, social, and governance (ESG): When it comes to investing, the applications and definitions are broad.

On a related note, the evolution of ESG has brought about more nuance. In this case, that’s a good thing. For example, sustainable investing is now its own concept, separate from ESG, though there are ties between the two.

Scenarios such as that could broaden adoption of exchange traded funds such as the Calvert US Large-Cap Core Responsible Index ETF (CVLC) and the Calvert US Select Equity ETF (NYSE Arca: CVSE). Another example of ESG-related definitions becoming more important — one pertinent to CVLC and CVSE — is the ongoing effort to differentiate between value-based and values-based investing.

Should that effort take shape, the ensuing clarity could compel investors apprehensive about ESG to give ETFs such as CVLC and CVSE another look and perhaps allocate dollars to those strategies.

Quick Explanation on the Differences

Values-based investing isn’t exclusive to ESG, but it has some relevant tie-ins. Put simply, a values-based investor selects investments based on environmental, political, or religious beliefs, among others. Value-based investing follows how ESG can improve a company’s financial performance while potentially adding value for shareholders.

“Value-based investing integrates the financially-material ESG issues which matter to financial performance and value creation,” noted Robert Eccles of Oxford University. “Taking account of financially-material ESG factors that matter to risk and return is no different from other risk factors such as liquidity risk, interest rate risk, brand equity risk, and political risk. In truth, there is no need for the term ‘ESG investing.’ More useful would be to distinguish between value-based investing and values-based investing.”

CVLC and CVSE are relevant here because while the ETFs employ sustainability and ESG methodologies in portfolio construction, they aren’t overtly ESG funds in the most traditional sense. Still, both values- and value-based investors can embrace the Calvert ETFs.

One of the big differences between values- and value-based investing, one highlighted by Eccles and one germane to the Calvert ETFs, is materiality. Eccles pointed out that materiality is pertinent to ESG, and when applied, it can avoid some of the ideological controversies often tied to ESG. There’s momentum for emphasis on materiality, as highlighted by recent efforts by the Sustainability Accounting Standards Board (SASB) and the International Sustainability Standards Board (ISSB).

“SASB has developed a ‘Materiality Finder’ which enables anyone to identify what it considers to be the material issues for any listed company,” concluded Eccles. “The work of SASB is at the core of the ISSB which currently has a consultation on how these standards can be adapted for international use.”

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