The world is changing. The climate is changing, the social landscape is changing, and the way we do business is changing.
In this new world, there is a growing demand for investments that are sustainable and socially responsible. This is where ESG investing comes in.
ESG investors believe that future-thinking companies that are committed to sustainability, social responsibility, and good governance are more likely to be successful in the long run.
Does this mean that balancing personal values in sustainability comes at the expense of financial performance?
Not even a little.
All around the world, post-covid financial priorities have shifted—and investing is no exception. Financial experts agree that not only is this shift permanent, but that values-based ESG investing will play a key role as time goes on.
In this article, we’ll cover the definition and purpose of ESG investing, the current trends and controversies, and the exciting future.
What is ESG Investing?
Coined in 2005, ESG (Environmental, Social, and Governance) refers to a set of standards for a company’s behavior. According to Forbes, “At its core, ESG investing is about influencing positive changes in society by being a better investor.” They break down the acronym as follows:
What kind of impact does a company have on the environment? This can include a company’s carbon footprint, greenhouse gas emissions, toxic chemicals involved in its manufacturing processes, and sustainability efforts that make up its supply chain.
How does the company assess and improve its social impact within the company and in the broader community, beyond just the sphere of the business? Social factors can include everything from gender, age, and racial equality and diversity in both the executive suite and staff overall, as well as in hiring practices.
How does the company’s board and management drive positive change? Governance includes everything from issues surrounding executive pay to transparency in leadership and reporting, as well as how well that leadership responds to and interacts with shareholders and others.
It is sometimes grouped together with larger trends such as Sustainable Investing, Impact Investing, Values-Based Investing, and Socially Responsible Investing (SRI). Socially conscious investors that personally align with these values use these standards to screen potential investments and assess current ones.
Trends and Controversies in ESG
Along with positive trends in ESG investing come undeniable and significant controversies.
Here’s a look at what’s happening now:
Lack of Standardization
Financial experts agree that the most significant issue surrounding ESG investments and performance is the severe lack of standardization among disclosures as to what exactly makes an ESG investment sustainable.
Like organic products before the USDA stepped in, for the most part ESG companies can still use whatever standards they decide matter. Since companies report their performance using different techniques and metrics, it can be challenging to compare them.
Potential for Higher Returns
“There’s a misconception out there that you need to be willing to give up returns in order to invest responsibly, but a growing body of research shows that ESG actually helps mitigate risk,” says Hank Smith of The Haverford Trust Company.
- According to a BlackRock study, “81% of a globally representative selection of purpose-driven companies with better ESG profiles outperformed their counterparts in 2020, despite a market downturn.”
- A December 2022 paper by the National Bureau of Economic Research suggests that not only are investors paying attention, but that they are willing to pay more–an average of 20 basis points more per annum–for ESG-screened funds.
- Consumers and employees are increasingly looking for businesses that share their values, and the movement towards global ESG reporting standards from both the business and regulatory communities is only expected to intensify.
Millennials and Gen Z
- A Pew Research Center survey found that Millennials and Gen Z stand out for their high levels of engagement with the issue of climate change.
- According to Nielsen data, 75% of Millennials are eco-conscious to the point of changing their buying habits to favor environmentally-friendly products.
- The majority of Generation Z shoppers prefer to buy sustainable brands, and most are willing to spend 10% more on sustainable products.
Well-intentioned but misguided marketing efforts can make companies appear ESG compliant on the outside, but that may not always be the case. McKinsey & Company states that “ESG can be presented as something of a sideshow—a public-relations move, or even a means to cash in on the higher motives of customers, investors, or employees.”
Greenwashing can look like:
- Selective disclosure
- Symbolic but meaningless actions
- Undefined terms
- Nonverifiable claims
According to a recent National Geographic article on greenwashing, “Companies promising to be sustainable, biodegradable, or environmentally conscious sometimes fail to meet the promises they make to consumers,” which can pull back the curtain on underlying insincerity.
In addition, a 2021 survey reported that because of issues like greenwashing, nearly three out of four institutional investors do not trust companies to achieve their stated sustainability, ESG, or diversity, equity, and inclusion (DEI) commitments.
What Does Sustainable Investing Mean For the Future?
For those who are sincere, ESG investing goes beyond the acronym to address how a company serves all of its stakeholders: customers, shareholders, workers, communities, and the environment.
But with all the hype around ESG investing, it can be easy to forget that in finance just as in other areas of life, real and lasting change takes time. Regardless of how many different names sustainable investing may have, the imperative for companies to earn their social license appears to be rising. Here are 3 of the MVPs in that ascent:
The Rising Role of Women
“The winds of investing in the U.S. are starting to shift and women, it turns out, are a driving force behind the change.” (MarketWatch)
Historically, women have aligned their investments with what they feel will benefit their families, neighbors, communities, and the planet. And with women making more money than ever before, it’s no surprise that a recent study by RBC Wealth Management – one of the biggest securities firms in the nation – found that female clients are twice as likely as male clients to prioritize ESG impact when considering which companies and funds to invest in.
Research by McKinsey shows that American women are earning more and increasingly controlling a larger share of wealth in the U.S. They estimate that by 2030, roughly two-thirds of the private wealth in the U.S. will be held by women. So why is the future of sustainable investing decidedly female?
RBC states that “Given their growing financial power, the values that women hold will shape how wealth is created, mobilized and passed down to the next generation.”
Because of their emotional and professional proximity to ESG issues, women are in a prime position to continue acquiring better paying positions in the workforce as ESG importance continues to grow. Additionally, women are also taking a more active role in investing than ever before.
In April 2023, Princeton University hosted a panel discussion on the future of ESG and green finance. Panelist Annette Nazareth, Chair of the Integrity Council for the Voluntary Carbon Market, called ESG “a complex area around science, disclosure, investing, fiduciary tradeoffs, and more,” and said that the SEC is hoping to have some solid ESG standards in place and ready to roll out in 2024.
Her hope is that the standards will be so clear cut that when people see an ESG label, “you will know exactly what you’re getting.” By doing the work of standardization on the front end, she emphasizes that consumers won’t have to do exhaustive research for every ESG company because there will be a set universal criteria.
True ESG Is A Process, Not An Outcome
Roger W. Ferguson Jr., another panelist and former President and CEO of TIAA, said that investors are putting more weight on ESG factors than ever before.
“We’re all on a journey here. Some believe we must achieve perfection… How much risk are you willing to take for how much reward? How does that evolve over time? It’s sort of the art and the science of investing, as much in the ESG space as any other investment space.”
Emily Pierce, the final panelist and Associate General Counsel and VP of Global Regulatory Climate Disclosure at Persefoni, left attendees with a simple message regarding ESG standardization and transparency in the coming years:
“Will it be perfect? No. Will it be better than it is? Yes.”
Considering that universal ESG standards are still in the works, there’s still a long road ahead to see how sustainable investing grows and transforms as those standards are created, shared, and put into place. Organizations must approach these measures strategically in order to remain relevant and to deliver meaningful impact to all stakeholders over the long term.
Taking Action With ESG Investing
In this blog post, we’ve covered the basics of ESG investing, looked at the current trends and controversies, and discussed where ESG is headed in the foreseeable future. Since people are willing to invest more in ESG companies and pay more for ESG products, a values-based investment strategy can prove very lucrative for those who do so with caution and guidance.
When it comes to tailoring your portfolio to include ESG investments, financial advisors aim to get a holistic, high-level view of your entire financial life. If you currently have a financial advisor, ask them to guide you toward investment choices that align with your personal values and investment goals. If you’re searching for one, ask candidates about ESG options they’ve recommended to other clients.
At Better Money Decisions, we believe that values-based investing is an integral part of the financial future for those that lead with their values. With one of our experienced advisors at your side, you have a trusted ally as you choose investments that will have a positive impact on the people and causes you care about.
Click “Schedule Now” on this page or contact a member of our team to find out how you can make ESG investing a part of your portfolio.