What Is ESG Investing?

ESG investing is a new concept for many investors. However, it has been around for a while. I recall taking an impact investing class in business school and learning about the challenges of benchmarking social impact investments. What is good for society is so objective; yeah, right? The class I took was great because it allowed us to think of what we would consider a social impact investment and then make our case. One of my classmates argued that recidivism could be reduced by investing in private prisons. Although I disagreed with her, she was sincere and laid out great arguments. She was also a wonderful classmate.

ESG investing, to some, seems to be an imposition to invest in something that an individual investor might disagree with. The public, me included, does not have the luxury to rebut a classmate on their assumptions about social impact, so how can we engage in the conversation and let our values be heard regarding ESG investing? This article will define ESG investing, its shortfalls, and how individual investors can choose what impact they want to make based on their own values.

What is ESG? ESG stands for Environmental, Social, and Governance. According to investor.gov, ESG investing is a way of investing in companies based on their commitment to one or more ESG factors. ESG is also known as “sustainable investing,” social responsibility investing,” and “impact investing.” The environmental factor might focus on a company’s environmental impact and assumes that climate change is factored into the risks and opportunities associated with a particular business. The social factor focuses on the company’s relationship with the community the company invests in. The governance factor might focus on how the company is run and executive compensation.

As impact investors see the benefits of ESG investing, critics argue that ESG investments allocate money based on political agendas, and companies and investors that employ ESG are too concerned about social outcomes, sacrificing profits. Also, ESG is seen as a threat to the oil, gas, and coal industries.

According to a Forbes article, What’s Behind the ESG Investment Backlash, Christine Ro states that companies have swung back and forth regarding ESG investing. “Vanguard realized that these efforts to remain neutral weren’t working; it left the Net Zero Asset Manager initiative (NZAM).” Even though the asset manager takes a neutral stance, it holds that investing in climate change benefits investors financially.

In the Harvard Business Review article, An Inconvenient Truth About ESG Investing, Sanjai Bhagat writes, “Investing in sustainable funds that prioritize ESG goals is supposed to help improve the environmental and social sustainability of business practices. Unfortunately, it may actually be directing capital into poor business performers.”

As an investor, it’s ok to have a subjective point of view regarding ESG investing. Like any investment, the investor should always come first. Before ESG became popularized, investors simply shared their preferences with their financial advisors, and their investment portfolios were adjusted accordingly. This practice has not changed. If you would like to talk about ESG investing, whether for or against it, don’t hesitate to reach out to me. As a fiduciary, I will ensure that your interest will come first.

If you already have an investment advisor, congratulations. However, if you’d like to learn more about what investment advisors do for their clients, please contact me at empiriKalpartners.com for an individual assessment.