It’s a personal choice whether you’re simply interested in making money or want to make sure you’re on your way to responsible company policies. But the choice is not as simple as it sounds. Finance does a great job of confusing us with terminology that acts as a shortcut for what you think you’re getting.The current finance buzzword on corporate sustainability is his ESG It’s an investment.
ESG stands for Environmental, Social and Governance and is a (kind of) objective measure of companies that meet criteria regarding environmental impact, social impact and how the company is managed. ESG scores are believed to be objective, but there are various rating platforms and criteria may differ between them. It’s important to know what ESG is, but it’s even more important to know what it isn’t.
ESG is not Socially Responsible Investment (SRI). SRI has been around for a long time and is generally aimed at filtering out business categories you don’t want to own. Depending on your religion and values, you can choose to exclude anything from cigarettes, fossil fuels, pharmaceutical companies, or even debt. However, ESG may also include companies that meet industry criteria that you wish to exclude. For example, the IShares MSGI USA ESG Fund includes energy companies, companies that are being sued for defective products, and companies that simply annoy you because of the way they do business (think cable companies). I’m here. If an extraction-based energy company is making plans to move from fossil fuels to alternative energy, is it a good company or a bad one?His ESG in this example is Schrödinger’s cat in investing is.
ESG is not impact investing. Impact investing seeks to make a measurable difference in areas such as climate while generating economic returns, but financial returns are a secondary consideration to impact. Impact investing often comes through private investment rather than the public investment you are most familiar with. Private markets may alleviate some of the natural tensions of listed stocks seeking to boost short-term shareholder value. Impact is a long-term, sustainable investment that delivers returns while serving a greater purpose. Investors vary in the holding period of the shares they own. Private markets tend to allow for more patient investing.
ESG investment is not without giving up. In theory, companies that perform well should also perform well, but research is not entirely clear on this. ESG is not an exception. By choosing companies with high scores on his ESG criteria in each sector. The best investment results may come from a combination of ESG and other technical factors.
ESG is not greenwashing. ESG investment and investments are evolving. There will inevitably be stops and starts along the way. Well-known green companies like Tesla were recently kicked out of ESG indexes due to their poor governance and social scores. Exxon is a large holding in the S&P 500 ESG Index due to its strong valuation relative to other energy companies. ESG is a corporate governance framework and an investment framework.
ESG investing is not always better than making more money and giving more. Your values are expressed in many ways, far beyond investments. Spending money is a common expression. The way money is distributed is also an expression. Some of our clients are more philanthropic and want their investment to be as big as possible as a way to donate more money.
ESG investing is not important. Whether you believe in his ESG or not, there is increasing pressure for companies to not only perform well, but be good citizens. There is some evidence that the two are complementary, but more evidence that they are not mutually exclusive. It is argued that investors who invest in instruments such as pension funds and retirement plan options on behalf of others are not fulfilling their fiduciary duty by investing solely through an ESG lens. This continues to be a multi-layered problem.
There are many ways to align your values with your investments. ESG is one of them, but it is complex and evolving.
Ross Levin is the founder of Edina Accredited Investor Wealth Management. He can be reached at ross@accredited.com..
