Is ESG investing good?
The success of ESG investing depends in some part on government policy. If legislators make a law which rewards ethical investing decisions, the funds can benefit greatly. A good example is policies which incentivise electric car purchases.
The success of ESG investing depends in some part on government policy. If legislators make a law which rewards ethical investing decisions, the funds can benefit greatly. A good example is policies which incentivise electric car purchases.
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
The category started to fall out of favor in 2022 as conventional energy prices soared. Political backlash against ESG led by Republican politicians in the United States, as well as suspicions of greenwashing involving claims that are not substantiated, have also tarnished the luster of ESG funds.
Despite of current economic challenges, ESG investments have shown to increase profits by 9.1% over the last three years, making it a smart investment choice.
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 |
Since ESG funds invest in companies that utilizes resources sustainably, is sympathetic to the well-being of its employees, stakeholders and society and is committed to clean governance, the potential risks are reduced.
Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.” In a line used by proponents, those in opposition to the ESG movement also believe there is substantial support behind them.
Like many economic factors, ESG factors exhibit diminishing returns, and trade-offs exist. Some ESG factors, such as employee satisfaction, have diminishing returns to scale but linear costs. Other ESG factors have hump shape relationships and ultimately negative returns.
ESG Risks are those arising from Environmental, Social and Governance factors that a company must address and manage. These risks are a combination of threats and opportunities that can have a significant impact on an organisation's reputation and financial performance.
Who is pushing ESG?
Over the past decade or so, ESG edicts became embedded into corporate America's ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon ...
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.
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).
89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.
Most of the ESG underperformance in 2022 can be attributed to ESG funds' underweight in the traditional energy sector, she noted in the report. “When ESG funds underperformed in 2022, we blamed it on their energy underweight,” said Ma.
Globally, ESG Leaders earned an average annual return of 12.9%, compared to an average 8.6% annual return earned by Laggard companies. This represents an approximately 50% premium in terms of relative performance by top-rated ESG companies.
Investors recognize that ESG can be an important factor in choosing whether to invest in specific companies. It may be time for executives to step up and fully integrate ESG into their equity story, making sure to connect ESG to value creation, and differentiate themselves from their peers based on ESG value impact.
Companies with a low ESG score are thought to have the worst environmental, social, and governance impacts. Undesirable ESG scores have also been linked to rising poverty levels in the communities where the firm operates, as well as poor employee mental health.
ESG does not really provide a positive risk premium, but rather a negative risk premium, once the performance is explained by the various risk factors and investment sectors. However, ESG can generate positive returns in certain conditions, using ESG momentum.
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
What is the ESG backlash?
The backlash against ESG—the use of environmental, social & governance factors in business and investing—is real and likely to increase. As ESG has recently become a political flashpoint, understanding its impact should be a priority for corporate leaders, because investors are likely to judge them by their responses.
“BlackRock has been the biggest contributor of inflows into ESG funds over the past five years, including the past couple of years,” said Hortense Bioy, Morningstar's global director of sustainability research.
ESG investing for LGBTQ+ diversity and inclusion
ESG investment offers an attractive way for the LGBTQ+ community to use its combined wealth to support corporations with strong diversity and inclusion policies.
Strive Asset Management and Inspire Investing offer the largest anti-ESG funds: Strive U.S. Energy ETF (DRLL): $369.2 million. Inspire 100 ETF (BIBL): $294.5 million. Strive 500 ETF (STRV): $266 million.
ESG as a concept is on the decline
ESG as an overall concept is becoming a smaller part of the news cycle. Corporate news is increasing around 5% quarter over quarter. But stories mentioning ESG as a singular entity are decreasing 7% each quarter.
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