The ESG Revolution: When Investing in Your Principles, Take Nothing at Face Value
The increasingly popular trend of sustainable living and social responsibility of corporations has shifted the way younger generations, and even older generations, think about their lifestyle and how they want to leave the world for their children and grandchildren. Many investors, though, may not be aware they can also incorporate these principles they hold dear into their investment portfolios. It’s important to use caution, though, and verify that what you see is what is what you get.
ESG stands for Environmental, Social, and Governance. It is an investing style that can be broad-based or completely unique to your views. As investor sentiment shifts towards wanting to hold companies that not only drive performance, but also do so in a sustainable and responsible way, the investment options in the category have grown significantly.
Many companies have begun prioritizing social issues and community involvement. From asset management firms to publicly traded companies and accounting firms, the push to invest sustainably and provide proof they are doing so is growing stronger. According to a report from accounting giant KPMG, 80% of companies worldwide now include sustainability reporting in their financial reports. In September 2020, the largest four accounting firms created a new recommended framework for reporting on ESG standards. In 2006, roughly $6.5 trillion in global assets under management incorporated ESG screens. As of 2019, that number has grown to $80 trillion.
We may very well be in the early stages of the ESG investing revolution. Incorporating your personal beliefs into your investments is becoming more and more feasible. From excluding fossil fuel-driven companies or companies in the alcohol or tobacco industries, to investing only in companies that have pledged to protect the environment or provide direct assistance to their communities, there is likely an ESG option for what you believe in.
The enormous opportunity in ESG also creates risk and false promises. A company simply stating they are pursuing sustainable operations or a fund that states they use ESG screens in their selection process may not be what it seems. It’s been trendy recently for companies to pursue carbon neutrality by 20xx, which is great for headlines, but oftentimes is little more than an empty promise. Hundreds of the largest companies in the world have made pledges like this. The public appeal and potential to attract investment dollars often entices companies and funds to market sustainability as a priority with little detail given on the actual efforts. This is referred to as “greenwashing” – making a product, policy, or action appear more sustainable than it actually is. Consumers can see this in products that claim to be “eco-friendly”, “sustainable”, “100% natural”, and similar labeling techniques. Some companies have gone as far as to simply make up environmental certifications.
A recent January report from the European Commission found that, for companies making “green” claims, nearly half of them examined were “exaggerated, false, or deceptive” and for over half the claims, companies did not provide enough information for consumers to verify the accuracy of the claims.
In short, the rising popularity of sustainability has done a lot of positive things, but it also creates a business opportunity for those looking to profit from it. Don’t take anything sustainability or ESG-related at face value. However, if this style of investing is appealing to you, you can certainly find opportunities to do so in the way you view appropriate.
If you’re interested in discussing ESG investing, Exeter’s ESG portfolios, or what options may be available to you, please contact us.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller. No investment strategy assures a profit or protects against loss.