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Financial market participants who have been following the news have probably noticed the recent debate between proponents of ESG and those who claim to be anti-ESG. ESG stands for Environmental, Social, and Governance, and from this structure, a type of investing has formed that is more socially conscious and takes into account risks typically associated with companies structure, the environment, and overall society at large (as well as potential opportunities within those areas). ESG is becoming increasingly popular among large institutional investors, with the percentage of investors implementing ESG strategies rising from 61% to 72% between 2019 and 2021. This is partly due to the satisfaction from the performance of ESG investments and partly due to sustainability regulations becoming more prominent in Europe and other areas around the world.
Anti-ESG, on the other hand, describes the opposition to ESG investing strategies. In the United States, many prominent Republican politicians have spoken out against ESG and have taken steps to prohibit state investment funds from doing business with asset managers that use ESG principles. Although ESG investing is still on the rise, it’s important to understand where this anti-ESG movement is coming from and debunk the myths often associated with ESG investing.
1. “ESG investing is a fad that will fade over time”
ESG investing has existed for decades, with investors in the late 90s beginning to take into account the ‘triple bottom line’ (financial, social, and environmental factors) in determining the value of a company or equity and investors utilizing divestment strategies for social purposes as far back as the 70s. It’s only grown in popularity in recent years, and with current regulations from the EU and the US emphasizing sustainability more than ever before, it’s better to embrace ESG and ESG investing than to dismiss it as a ‘fad’.
2. “ESG hurts returns and contradicts the concept of fiduciary duty”
The fact that so many institutional investors have already implemented ESG strategies in many of their portfolios and the rising popularity of ESG itself easily refutes this claim, as it would hardly have the notoriety it does if ESG hurt rather than helped profits. However, we also have years of studies to refute this claim as well, such as the 2006 Oxford study demonstrating the positive relationship between investments that incorporated ESG strategies and performance, or the paper published by a Wharton Business School professor demonstrating how “100 best companies to work for” outperformed their peers in terms of stock returns, and multiple other papers that have come afterward. If anything, incorporating ESG strategies supports the concept of fiduciary duty.
3. “ESG investing is too subjective and lacks standardization”
While the lack of standardization has been a bit of an issue, many governmental bodies and different organizations have come together to help create a global standard for ESG reporting and related disclosures, such as the SFDR and Taxonomy. Additionally, many guidelines and frameworks also exist to help ease the reporting process and data collection for investors, such as the GRI, SASB, and more. In terms of subjectivity, most of the information being reported is either quantitative or, if qualitative, has to be proved, and the stringency of these standards are being continuously reviewed and improved upon.
4. “ESG investing is too focused on social issues and ignores financial performance”
ESG is not any more focused on social issues than it is on environmental and governance issues. While investors may decide for themselves whether they want to focus on one area of ESG more than the other, most investors tend to take into consideration all aspects when applying ESG strategies to their portfolios. This is because incorporating ESG strategies can lead to higher financial performance, something discussed previously in point two. However, if an investor took aim at one pillar of ESG, that is okay too, many investors are building portfolios with a curated impact profile that can appeal to a specific audience with matching values.
5. “ESG investing is too political and will lead to biased investment decisions”
If ESG investing is political, it’s only because of movements like anti-ESG that seek to politicize it. The concept of ESG investing itself is apolitical and simply provides another strategy to investors looking to maximize their returns and minimize risks associated with the environmental, social, and governance aspects of their investments. It’s not any more or less biased than another investment strategy that prioritizes the maximization of returns coming from one’s investments. Attempts to treat it as something other than such will only lead to investors becoming disadvantaged when developing their investment goals.
At the end of the day, anti-ESG is another attempt to politicize something for some political (and potentially even economic) gain. However, it doesn’t change the fact that ESG investing is increasing in popularity and becoming more important to an investor’s financial returns. We urge our audience to direct their focus to the increasing importance and prominence of ESG and learn how it can help your investments in the long run.
Physis is a fintech company that offers investors a variety of sustainability offerings and data to track the impacts of their investments, including insights on a company’s ability to meet its COP27 commitment! We make it easy for institutional investors to prove the sustainability of a company or fund beyond the ambiguous ESG score. Find out how we can help you today!