Why do investors like ESG?
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
When businesses report their performance for ESG criteria, it helps investors evaluate a broader range of business activities beyond financial performance. This analysis is both based on existing performance and future targets and trends. Investors can use ESG data to predict a company's long-term viability.
ESG investing can help investors mitigate risks
Focusing on ESG issues forces companies to think about the long-term sustainability of their enterprise rather than short-term profits. Most investors also think in the long term rather than the short term.
ESG investing focuses on companies that follow positive environmental, social, and governance principles. Investors are increasingly eager to align their portfolios with ESG-related companies and fund providers, making it an area of growth with positive effects on society and the environment.
An ESG criteria is thought to help investors consider the 'unmeasured' or 'unrepresented' environmental, social and governance topics when making investment decisions. It reveals data that traditional financial analysis doesn't usually capture, speaking to a company's sustainability in its broadest sense.
Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.
Environmental, social, and governance issues are becoming increasingly relevant for a variety of stakeholders. Investing with ESG goals in mind has become a big focus of asset managers in recent years, and executive compensation is tied to ESG performance in a majority of S&P 500 companies.
One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.
One of the main disadvantages of ESG criteria is that companies are not required to disclose all information related to their sustainability practices. This can make it difficult for investors to evaluate the sustainability and ethical impact of investments.
ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.
Who is behind ESG?
The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).
- Environmental – this has to do with an organisation's impact on the planet.
- Social – this has to do with the impact an organisation has on people, including staff and customers and the community.
- Governance – this has to do with how an organisation is governed. Is it governed transparently?
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005.
Successful companies are implementing ESG strategies that increase financial, societal, and environmental impact as well as ensure long-term competitiveness.
- Strive U.S. Energy ETF (DRLL): $369.2 million.
- Inspire 100 ETF (BIBL): $294.5 million.
- Strive 500 ETF (STRV): $266 million.
- Inspire Corporate Bond ETF (IBD): $256 million.
- Inspire International ETF (WWJD): $193 million.
Pros | Cons |
---|---|
Can help investors diversify their portfolio | ESG funds may carry higher than average expense ratios |
May reduce portfolio risk | ESG investing is still a fairly new concept and there isn't a ton of reporting on performance |
The core criticisms from the investing community contend that ESG is just a fad and that corporate sustainability reports are a weak metric for assessing actual risks. Some ESG-centric investors argue that the sector should focus more on environmental factors and less on social and governance.
- Volkswagen Emissions Scandal: Environmental Mismanagement. ...
- Foxconn Worker Conditions: Social Negligence. ...
- Wells Fargo Account Fraud Scandal: Governance Failures. ...
- Exxon Valdez Oil Spill: Environmental Destruction. ...
- Enron Scandal: Social and Ethical Misconduct.
Yes, by embracing ESG-compliant strategies and policies, companies can often be doing themselves harm. This doesn't mean to say that they should abandon these actions, but by acknowledging and identifying these problems they can be worked around, and hopefully result in a healthier balance sheet and a healthier planet.
When you choose ESG investing, you're putting your money to work in companies that strive to make the world a better place. This type of ethical investing strategy helps people align investment choices with personal values.
Do Republicans support ESG?
Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
ESG remains a fatally flawed investment paradigm. It is premised upon unreliable data and the dangerous, highly misleading idea that tilting away from certain shares or bonds will fundamentally alter corporate behavior, improve risk-adjusted returns, and result in better social and environmental outcomes.
In its basic form, greenwashing uses manipulation and misinformation to garner consumer confidence around a company's environmental, social or governance (ESG) claims.
There is a potential for “greenwashing”
Some companies may make claims about their ESG practices that are not fully supported by their actions which can lead to “greenwashing”. This may make it difficult for you as an investor to identify truly sustainable companies.
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