Do investors really care about ESG?
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.
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.
But the survey also shows that 72% of respondents think it is important for companies to take action on ESG, and nearly two-thirds (60%) agree that companies should speak up when it comes to issues that are important to their employees and customers.
Ensuring that your investment choices are aligned with your priorities is one reason to pursue ESG investing. “Many clients are very concerned about environmental and social problems, such as climate change leading to more and severe climate crises, gender and racial inequality, data security and privacy,” says Zhang.
ESG investments could be worth pursuing in 2024 and beyond because they may offer competitive returns and might support your wider ethical goals. However, you may need to be cautious about “greenwashing” – companies presenting themselves as sustainable despite the fact their business practices do not reflect this.
The term ESG is fine, according to a recent poll of 1,000 Americans. Despite continued polarization related to the acronym, which stands for environmental, social and governance, the majority of Americans believe it's the best way to describe a company's approach to improve business, society and the environment.
Done well, ESG is all about common sense and sound strategic planning. While it may be difficult to express all aspects of good governance, climate change, or human capital issues in strictly financial terms, we know that these are hugely important to a company's long-term success.
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.
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.
Who is behind ESG?
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005.
While one in five globally (21%) have made investments in ESG, there are more than twice as many investors who say they are interested (49%).
ESG investing has been developed primarily by and for large institutional investors (pension funds, sovereign wealth funds, endowments, etc.). The American tradition of socially responsible investing (SRI) that had started in the 1970s, and was instead focused on retail investors, had remained indeed very marginal.
“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.
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.
Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.
Congress in March passed a Republican-backed resolution to repeal the rule but Biden, a Democrat, vetoed it. ESG involves factors that investors may take into account such as a company's climate- and environment-related policies, diversity practices and corporate governance issues such as executive compensation.
Among the new laws, measures in Kansas and Kentucky limit the use of ESG in public retirement system investments. An Indiana law took effect July 1 to prohibit the public retirement system from contracting with service providers that make ESG commitments.
Florida and Texas lead the state-level push against ESG
Under the direction of Gov. Ron DeSantis, Florida is leading the movement against ESG initiatives, looking to punish asset management firms who consider environmental, social and governance principles or have ESG funds.
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.
Is ESG a threat?
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.
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.
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.
ESG initiatives. And as they do, Out Leadership is here to help them realize even stronger profits by explicitly including LGBTQ+ equality initiatives in ESG strategies.
Too Much Exuberance
This has led to a number of problems, including: Inflated prices: ESG-labeled investments are often priced higher than comparable investments that are not labeled as ESG. This is because investors are willing to pay a premium for the perceived environmental and social benefits of ESG investments.
