Is ESG a better investment?
Photo by Jon Tyson on Unsplash
Making an investment that makes you money and does good for society simultaneously is a win-win. That’s the premise behind ESG.
But in reality, ESG is not as clear-cut as one would expect. And not everyone is in support of ESG investing.
As I’m discovering as I grew older, there’s much more behind things than just face value. That includes something that should be as great as ESG.
Environmental, Social, and Governance
ESG stands for environmental, social, and governance. ESG investing refers to a set ofstandards for a company’s behaviorused by socially conscious investors to screen potential investments.
Environmental issues may include corporate climate policies, energy usage, waste, pollution, and natural resource conservation. Social criteria examines how a company manages relations with various stakeholders such as employees, suppliers, customers, and local communities. Governance ensures a company is transparent, shows integrity, and is accountable.
ESG investing has been around as a term for more than fifteen years. Around 2018, it began to take off — and also when I first heard of it. In 2018, global ESG assets under management were$30.6 trillion, up from $22.8 trillionin 2016.
Bloomberg expects global ESG assets to exceed $53 trillion by 2025. This would represent more than a third of the projected total assets under management.
If investment managers were somehow still avoiding ESG, they won’t be for long.
About one-third of millennials use investments that take ESG factors into account. As millennials enter their prime wage earnings years, they will dictate where money is invested even more. Additionally, a2019 report encompassing all generations found that 72% of the U.S. population “expressed at least a moderate interest in sustainable investing.”
BlackRock
BlackRock is an investment company that holds immense power. They currently have over $8 trillion in assets under management. Their AUM was more than $10 trillion as recently as 2021, before markets declined.
With all that money,BlackRock has a significant influencein almost every facet of life. This includes ESG.
BlackRock has become caught in the middle of a tug-of-war ESG battle. Texas thinks BlackRock is too ESG-focused; New York City thinks BlackRock isn’t ESG-focused enough. And they are both making their arguments with billions of dollars.
In August, Texas ordered its state retirement funds and other public entities to divest from nearly 40 BlackRock funds. A few days ago, a month after Texas’ statement, New York City demanded that the investment firm align its portfolio with its net-zero carbon emissions pledge. For reference, BlackRock manages $43 billion in NYC retirement system investments.
Is ESG Effective?
People have questioned how effective ESG investing truly is. It’s easy for a company to aspire to be more ESG friendly or for an investment firm to create a new fund and slap an ESG label on it. But what does ESG really entail?
The Securities and Exchange Commission (SEC) hasproposed public companiesbe required to include extensive climate-related information in their SEC filings. The SEC also proposed regulations requiring some investment companies and advisers to disclose details about their ESG investment practices.
While having more information available to investors is always beneficial, I question who decides on the criteria. What constitutes an ESG investment vs. a non-ESG investment? And who is the group choosing the requirements?
Aside from my lack of trust in criteria, evidence suggests ESG investing does not yield greater returns than “normal” investing.
Looking back to 2007, ESG funds generated anannualized returnof 5.44%. Non-ESG funds returned 6.09% per year since then.
In addition to underperforming, companies in ESG portfolios also hadworse compliance recordsfor labor and environmental rules. And for new companies added to ESG portfolios, once added, they did not improve compliance with labor or environmental regulations.
Unfortunately, there is reason to believe that ESG, similar to “carbon neutral,” is used by companies and investment managers to gain attention and recognition, not to make an actual difference.
Final Thoughts
ExxonMobilis in thetop 100 list of ESG companies. This seems counterintuitive to me.
A ranking such as this makes me question ESG even more.
While I fully support the idea of ESG — investors being able to make money while also doing good for the community — I struggle to believe its validity.
$ESG Concept(BK4567)$ $Blackrock ESG Multi-Asset A2 SGD-H(LU2077746001.SGD)$ $Blackrock Sustainable Global Bond Income A2 USD(LU1842103399.USD)$
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