But what is the truth about ESG and sustainable investing?
Investors consider environmental, social and governance (ESG) factors when investing. Many investors use ESG factors to better understand how to invest in a responsible and sustainable way.
After seeing headlines in local and national papers questioning what ESG considerations mean for investors, it isn’t surprising that many Americans are confused about sustainable investing. Some might find themselves asking questions like:
Why is ESG investing important? Do corporations have a social responsibility? What are investors’ responsibilities? To what extent do they or should they use their investments to support what’s good for the world or the environment? What are the ethics related to investing? What impact do investing decisions have on the environment? Why is ESG a political hot potato?
Below we address the most common questions point by point.
At the end of 2022, there were $8.4 trillion in U.S. assets under management in funds that prioritize ESG factors, and that number is expected to grow exponentially in the coming years. Research suggests that sustainable investment strategies can achieve comparable financial returns as conventional investments over the long term. Simply put, sustainable investing makes good financial sense.
In fact, it is simply 'investing' while considering a wide range of potentially financially material environmental and social risk and opportunity factors. Some investors 'brand' their thematic funds as 'sustainable' as they may be using an enhanced classification system to support a particular strategy. But, assessing environmental and social risks doesn't just have to support a particular fund approach, it can be part of a firm-wide due diligence protocol. More comprehensive overview of a company can uncover risks as well as unrecognized strategic value.
Sustainable investors come from a variety of viewpoints and have a range of focuses and have no single “agenda” or “politics.” Instead, there are a range of sustainable investment approaches and product choices to meet the interests and needs of all kinds of investors--from those focused on corporate governance to those seeking carbon free or environmentally focused investments to those who pursue faith-based priorities.
However, some politicians want to make ESG political. These politicians use terms like “woke investing” in an attempt to link environmental and social considerations (such as addressing water pollution, supporting a transition to clean energy and encouraging fair working conditions) to the culture war. It is imperative that policy makers understand sustainable investing and the use of ESG criteria. The market has embraced investment practices that put ESG at the core, and policymakers need to catch up.
Simply put, attacks on ESG are anti-free market and anti-free speech. All investors want free investment choice and to ensure that choice isn’t limited by politically motivated policies.
It is the responsibility of corporations to meet minimum standards on workplace safety and to mitigate damage to our shared world. Many consumers and investors would be willing to pay a premium for goods that are produced in an ethical way.
For example, some consumers prefer to purchase from companies that ensure equity in the workplace, demonstrate transparency and good governance, sell products that are produced without polluting our environment or putting our future at risk.
Consumers and investors alike hold everyone to account and integrate good business practices. These good practices will continue to evolve as our knowledge and understanding grows about what makes good resilient companies. The good news is that companies that have robust ESG policies create shareholder value, have lower cost of capital and generate better returns for investors over the long haul.
In fact, climate change is one of the greatest risks the farming community faces – the recent droughts, fires and floods in the US have bankrupted farmers and driven prices up on supermarket shelves. Farmers are adopting soil management and other practices to help build in crop resilience and soil heath. This reduces risk and enhances long term outcomes for the farmer, the consumer and ensures global food security.
Companies are already required to make material financial disclosures. Those who focus on the expense are choosing to overlook the risks associated with ignoring environmental and social problems and bad governance. Regardless of potential additional costs, investors of all types need to be aware of real risks that a company will face from issues like climate change. These disclosures are material and cannot be ignored.
For many companies, they are already required to make these disclosures to other jurisdictions like the EU.
Many of the efforts to limit the use of ESG factors by investors at the state level have been funded by the fossil fuel industry and are seeking to protect industry interests.
Attacks on ESG are political moves by politicians hoping to garner votes at the expense of their constituents. A 2022 Wharton study showed that these efforts to implement anti-ESG policies in states has led to increased financing costs and reduced outcomes for the state. By banning major financial institutions and state-run pensions from using ESG factors, politicians are inappropriately meddling with investor’s fiduciary duty that states that investors have to evaluate risk and act in the best interest of plan holders.
However, every investor has the freedom to identify what information is important to them and invest according to their own investment philosophies and fund strategies..
For example, when it comes to ‘values-based investing’, there are myriad funds that reflect various religious values such as Christian, Muslim, Jewish and other faith traditions. These funds mindfully invest according to the tenants of each faith.
There are also a range of funds that focus on specific themes of gender, water stewardship, antidiscrimination or zero carbon. Equally there are funds that screen for tobacco, weapons, alcohol, abortion or pornography.
The truth is sustainable investors, or simply investors, come in all shapes and sizes and prioritize different ESG criteria.
Often, employees and customers of companies are the loudest voices when it comes to encouraging companies to be more sustainable, instituting good employment practices, ensuring diverse leadership and being forthcoming and transparent about their political spending.
Far from making them adopt unwelcome strategies, investors who engage with company management must make a sound business case - supported by research and data- about the long-term benefits of these practices. Most, if not all companies, elect to make these changes and are not coerced by investors, consumers or employees.
Far from being combative, many investors who practice shareholder engagement on ESG-related topics are known to advance their objectives through civil conversations with company management. Their goal is to unlock value and improve shareholder return.
Many companies have broadened their expression of corporate values to prioritize a wider range of stakeholders. Companies recognize that their employees and customers care about their corporate values. Today, companies recognize that their purpose is more than simply serving shareholders and they have a responsibility to ensure that they are not maximizing profits at the expense of the environment and society
Most companies need to serve a variety of stakeholders including employees, the community and the environment too. ESG data is information that helps investors to identify material factors that influence a company’s health and measure a company’s environmental, social and governance performance.
This website is presented by US SIF: Sustainable Investment Forum, the leading voice advancing sustainable investing across all asset classes. Its mission is to rapidly shift investment practices toward sustainability-aligned goals with the aim of achieving long-term investment goals and preserving our planet and society. US SIF’s hundreds of members represent more than $5 trillion in assets under advisement or management.
US SIF is supported in its work by the US SIF Foundation, a 501(C)(3) organization that undertakes educational, research and programmatic activities to advance the mission of US SIF.
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