What is the problem with ESG investing?
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers.
Critics portrayed ESG investing as primarily motivated by political concerns and a potential drag on returns. Additionally, some critics have raised concerns about the complexity and reliability of ESG metrics.
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.
For example, ESG factors rarely focus on assigning social or environmental value to the products and services that the 'paper mills' produce; it's squarely about how the businesses are run - which makes values-based screening and impact-linked revenue streams out of scope - and arguments about a company with 'good' or ...
Fundamentally, there is a principal-agent problem in ESG investing. This is because investors – be it institutional or retail – delegate investment decisions to portfolio managers who are supposed to be superior not only in picking stocks that will outperform the market but also at assessing firms' ESG credentials.
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.
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.
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.
ESG investing reflects an approach to ethical decision making known as the common good framework.
Many academic studies have investigated the relationship between ESG ratings and stock returns. They offer no conclusive evidence that investments that are based on ESG criteria outperform those that are not. Some studies find that good ESG performers earn higher stock returns while other studies report the opposite.
Who is behind ESG?
The UN makes it official. A 2004 report from the United Nations – titled Who Cares Wins – carried what is widely considered the first mainstream mention of ESG in the modern context. This report leaned in heavily, encouraging all business stakeholders to embrace ESG long-term.
In its basic form, greenwashing uses manipulation and misinformation to garner consumer confidence around a company's environmental, social or governance (ESG) claims.
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. S&P Global.
Environmental and societal issues, such as climate change, biodiversity loss, modern slavery, inequalities, food security and others are interconnected and lead to risks and opportunities for both, businesses, and society.
The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.
Successful companies are implementing ESG strategies that increase financial, societal, and environmental impact as well as ensure long-term competitiveness.
ESG investing for LGBTQ+ diversity and inclusion
The companies included in the index have policies supporting equality for gender and sexual orientation.
Amidst this global trend, BlackRock, the world's largest asset manager, has taken a bold step by transitioning its investment strategy from ESG investing to a broader approach called transition investing. This move has significant implications not only for BlackRock but for the entire financial industry.
With accusations of “greenhushing,” “greenwashing,” and “woke capitalism,” the three letters “ESG” have become synonymous with backlash. The rhetoric is simple if one wishes to undermine economic decisions that encourage ethical behavior as a primary concern.
Every product Vanguard offers, including our ESG investments, must meet our rigorous standards and align with our time-tested investment philosophy. We currently offer seven ESG products: four exclusionary index funds and three active funds.
Which company has the greatest increase in ESG?
| Rank | Company | 3-yr EPS growth rate |
|---|---|---|
| 1 | Microsoft | 18 |
| 2 | Applied Materials | 29 |
| 3 | Woodward | -9 |
| 4 | Verisk Analytics | 2 |
| Denmark | A | 97.7 |
|---|---|---|
| Finland | A | 96.7 |
| New Zealand | A | 94.0 |
| Sweden | A | 94.0 |
| Switzerland | A | 92.2 |
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.
| 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 |
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.
References
- https://www.mckinsey.com/capabilities/sustainability/how-we-help-clients/sustainability-and-social-impact-strategies/environmental-social-and-governance
- https://www.robeco.com/en-us/glossary/sustainable-investing/esg-definition
- https://www.forbes.com/sites/chriscarosa/2023/03/27/who-supports-esg-investing-and-whos-against-it-and-why/
- https://www.forbes.com/sites/christinero/2023/01/29/whats-behind-the-esg-investment-backlash/
- https://knowledge.wharton.upenn.edu/article/how-retail-investors-value-esg-and-frame-sustainable-investment-strategies/
- https://www.msci.com/esg-101-what-is-esg/evolution-of-esg-investing
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- https://www.skyjed.com/blog/top-3-esg-trends-that-impact-the-success-of-your-products-and-services
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- https://raoglobal.org/blog/blackrocks-shift-from-esg-investing-to-transition-a-bold-move-towards-sustainable-transformation
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- https://www.bankrate.com/investing/esg-investing-statistics/
- https://www.nasdaq.com/articles/what-financial-advisors-have-to-say-about-the-esg-controversy
- https://www.theglobeandmail.com/investing/investment-ideas/article-esg-the-good-the-bad-and-the-ugly-or-just-the-bad-and-the-ugly/
- https://www.scu.edu/ethics/leadership-ethics-blog/is-esg-investing-ethical/
- https://fortune.com/recommends/investing/what-is-esg-investing/
- https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-history-of-esg/
- https://fortune.com/europe/2024/02/22/anti-esg-backlash-america-europe-waters-down-sustainability-agenda-environment-politics/
- https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
- https://esg.conservice.com/how-esg-supports-lgbtq-community/
