Why do investors like ESG?
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.
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 ratings have numerous advantages, such as helping investors to identify companies that are more likely to contribute to a sustainable development (when using impact ratings), produce long-term financial returns, managing ESG risks and opportunities, (when using risk ratings), encouraging accountability and ...
- It reduces risk and creates value for investors and for companies.
- It helps regulators to get information and process it as well.
- Investors are increasingly choosing to invest in companies that align with their values and goals.
ESG is a set of criteria across environmental, social, and governance dimensions that may have material effects on business performance. Investors use ESG considerations to assess the risks and opportunities present in potential investment decisions.
This is partly due to increased awareness of the impact that companies can have on the environment and society, and partly due to the growing evidence that companies with strong ESG performance are more likely to outperform their peers over the long term.
ESG programs help businesses attract investors, build customer loyalty, improve financial performance, make operations sustainable and gain a competitive edge.
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005.
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.
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).
What are the pros and cons of ESG investment?
| 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 |
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.
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 ...
One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.
Because we believe that climate risk is investment risk, BlackRock's active portfolio managers seek to understand how they can use environmental, social, and governance (ESG) data as a lens to identify new risks and opportunities, and to build more resilient and better performing portfolios.
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.
Launched in 2010, MSCI ESG Research is one of the largest independent providers of ESG ratings, providing ESG ratings for over 6,000 global companies and more than 400,000 equity and fixed-income securities.
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.
Increasingly, the ESG movement has been labelled as "woke" capitalism, and accused of enabling greenwashing. As a result, Taylor says that even as businesses continue to issue net zero pledges, they've stopped labelling their business decisions as "ESG".
The 5 Top Anti-ESG ETFs by Assets Under Management
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.
Is there a conflict between profits and ESG?
In other words, it's clear that ESG (which includes diversity) metrics should not be considered in conflict with profit objectives.
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. They say ESG is just the latest example of the world trying to get “woke.”
- Environmental. Conservation of the natural world. - Climate change and carbon emissions. - Air and water pollution. ...
- Social. Consideration of people & relationships. - Customer satisfaction. - Data protection and privacy. ...
- Governance. Standards for running a company. - Board composition. - Audit committee structure.
Environmental, social and governance, or ESG investing, is a form of sustainable investing that considers an investment's financial returns and its overall impact. An investment's ESG score measures the sustainability of an investment in three specific categories: environmental, social and corporate governance.
| Company | ESG Risk Rating | Industry Rank |
|---|---|---|
| Stellantis NV | 23.4 Medium | 34 out of 89 |
| Bayerische Motoren Werke AG | 24.8 Medium | 45 out of 89 |
| Tesla, Inc. | 25.3 Medium | 49 out of 89 |
| Toyota Motor Corp. | 29.3 Medium | 76 out of 89 |
