Do You Have Good Reason to be Skeptical About ESG Investing?

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Published on May 18, 2021

| 5 min read

John Cardinali, CFA, Senior Managing Director, Business Development

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With over US$30 trillion in managed ESG assets, this fast-growing investment category is proving to have profoundly resonated with investors worldwide. And with 34% growth in the last two years, it seems poised to become a meaningful part of the investment landscape. There are plenty of detractors, of course, so we thought we’d share some insight on the topic and some issues to consider.

Let’s Start with Some Basics

Consideration of environmental, social, and governance (ESG) issues has captured the attention of institutional investors worldwide, but what are these issues? ESG investments incorporate company risk or growth factors beyond traditional analysis. The figure below identifies 37 different ESG criteria (Figure 1) that potentially impact a company’s performance.

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Unfortunately, ESG measurements are not standardized nor reported voluntarily, and they are often intertwined with other systematic factors. Nonetheless, industry groups are actively converging on these challenges to include ESG factors into investment processes reliably.

Why Are Institutions Adopting ESG?

While ESG adoption has been slow in the U.S., over 40% of institutional investors now consider ESG in their investment decisions, according to a 2020 ESG Survey done by Callan Associates. Reasons the survey outlined included stakeholder concerns, alignment of portfolio and organizational values, an improved risk profile, fiduciary responsibility, higher long-term returns, and the ability of a fund to make an impact. The survey compared pre-2005 attitudes with post-2015 attitudes – and it seems that recent adopters are more likely attempting to address stakeholder concerns and improve risk profiles (Figure 2).

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“…recent adopters are more likely attempting to address stakeholder concerns and improve risk profiles.”

 

Why Investors Might Have Reservations About ESG

Given that ESG investing is an evolving investment practice, many investors may understandably have misgivings and concerns regarding ESG adoption. Therefore, we thought we’d share some thoughts on the more common questions we hear from clients about ESG investing below.

Don’t I already consider ESG issues indirectly in traditional analysis?
Traditional analysis may indeed include a cursory probe into some ESG issues, but ESG analysis is broader in scope and accounts for their systematic impact. Thus, we believe investors should view traditional investment analysis and ESG analysis as complementary endeavors.

Does integrating ESG prioritize moral values over economic values?
Considering ESG criteria doesn’t necessarily highlight a moral viewpoint. Instead, ESG criteria provide additional information about risk-return potential, and fiduciaries should account for any factor that could impact risk or return.

Are we just “repackaging” socially responsible investing (SRI)?
There are differences between “SRI” and “ESG”; unfortunately, labels describing non-financial factors are somewhat inconsistent. SRI generally relates to avoiding morally questionable businesses, while ESG analysis seeks to identify investment risks and opportunities.

Don’t ESG data challenges preclude dependable and consistent ESG results?
ESG data challenges are a valid concern. Reliable, current, comprehensive, and historically extensive ESG data are essential, but ESG data are in a nascent stage and often subjective, making stock-level scores varying and unpredictable. However, we believe aggregated portfolio-level ESG results can be a more stable source of data for evaluation (Overcoming ESG Data Challenges, Intech Investments, January 2021).

Find Out More

We know you’re busy. That’s why we kept this brief and created an eBook on the topic for you! Our five-minute primer on sustainable investing can fill you in on what you need to know about sustainable investing, and how to incorporate it. It provides quick, direct answers to basic questions about sustainable investing:

  • What is sustainable investing? Is it different from ESG?
  • Why do institutional investors adopt ESG criteria?
  • What misgivings do investors have about ESG?
  • How do you invest in a sustainable future?

Download the guide today and get started!

†Source: Global Sustainable Investment Review 2018, Global Sustainable Investment Alliance. Assets are reported as of 2017-12-31. Asset growth is for the two-years ended 2017-12-31. All asset values are expressed in US dollars, converted at the exchange rates at the time of reporting.
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