The Ethical Investor: Confirmed – ESG investors care for the environment… as long as it turns a profit (2024)

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The Ethical Investor: Confirmed – ESG investors care for the environment… as long as it turns a profit? ›

The Ethical Investor: Confirmed – ESG investors care for the environment… as long as it turns a profit. A new research paper by Wharton University found that retail investors care about a stock's ESG related activities – but only if they don't adversely affect the value of their investments.

In a recent research paper, Kelly Shue and Samuel Hartzmark found that the E.S.G. investing movement, despite its good-for-the-planet intentions, doesn't actually do much for the planet.

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.

Investors who apply ESG criteria believe that these factors can provide critical insights into a company's long-term prospects, making companies with strong ESG practices more resilient and potentially more profitable investments.

Environmental, social and governance (ESG) is a framework used to assess an organization's business practices and performance on various sustainability and ethical issues.

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.

One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.

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.

ESG risks, when poorly managed, can have a significant impact on a company's reputation, finances and long-term viability. The effect of these risks can range from fines and legal penalties to loss of customer, employee and investor confidence.

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).

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.

Often, it means filtering out certain types of companies and sectors – usually 'sin stocks' like tobacco products and companies involved in animal testing. The significant difference between ESG and ethical investment is that the latter focuses more on subjective, moral judgements than performance considerations.

What is ESG explained in simple terms? ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate a company's sustainability and ethical impact.

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.

In contrast to much of the positive reception ESG has received, some evidence suggests that it isn't even offering financial benefit for investors and businesses. A study conducted by researchers at the University of Chicago found that high sustainability funds hadn't outperformed any of the lowest rated funds.

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.

Climate change is the highest priority ESG issue facing investors. The PRI works to help investors protect portfolios from risks, take advantage of opportunities and deliver real-world impact in the shift to low-carbon, resilient economies.