What is ESG Investing?
ESG is short for (“environmental, social, governance”). ESG investing has become a hot topic recently, and we will continue to see it dominate news headlines. ESG is currently estimated to be a $30 trillion sector. ESG investing may be considered synonymous with Socially Responsible Investing (“SRI”) and Impact Investing.
Why is ESG Investing Popular?
The Biden administration has signaled plans to make ESG an increasingly important regulatory priority amid rising calls for “principles-based” disclosures. The Trump administration created regulations for private-sector retirement plans stating that fiduciaries must not put ESG goals ahead of financial ones. The Biden administration has since announced a policy of non-enforcement.
Large investors such a BlackRock have pushed for publicly traded companies to adopt targets around their climate impact, racial equity, and other ESG issues.
Warren Buffet’s Berkshire Hathaway disagrees. The conglomerate dismissed investors’ calls for climate change and diversity & inclusion (“D&I”) reporting, calling the disclosures “not necessary.”
Before going mainstream, ESG investing was a niche topic. Many investors saw it as a trade-off between value and “values.”
What Does E, S, G Stand For?
ESG investing aims to avoid or eliminate exposure to certain companies and sectors that violate the investor’s values as well as align investment dollars with certain corporate behaviors and activities that are seen as responsible.
“E,” which stands for “Environmental,” encompasses topics such as climate risk, natural resource scarcity, and pollution.
“S,” as in “Social,” includes topics like labor relations, product liability risks, privacy, and data security, and health and safety of employees and consumers.
“G,” or “Governance,” relates to executive compensation, corporate board equity, and transparency around political contributions.
It is necessary to note that universally accepted reporting standards for ESG investing have not yet been adopted. Therefore, the list above is not inclusive and has an aspect of subjectivity.
Who is Driving ESG Investing Popularity?
The popularity of ESG investing is driven, in part, by younger generations. Generation Z and Millennials tend to be more focused on a company’s values than previous generations were. A survey conducted in 2017 found that Millennials are twice as likely as the average investor to make investments in companies they saw as demonstrating sustainable practices. 75% of Millennials believed that their investment could make an impact, such as reversing climate change.
The SEC has stated that it will form a task force focused on ESG issues and concerns. Gary Gensler, Biden’s pick to lead the SEC, had a recurring theme in his Senate confirmation hearing testimony around corporate disclosures such as political spending disclosures. The acting chair of the SEC, Allison Herren Lee, has been actively signaling that ESG disclosures will be a priority for the agency. She notes, “human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues.”
Are You a Values-Based Investor?
It appears that ESG investing is here to stay for the time being. It can bring value to an investing strategy; ESG metrics can provide insight into risk management and non-tangible aspects such a brand and reputation.
Could ESG investing be the right strategy for your portfolio? Value-based investing is a personal decision for every investor to make. Read more here: Common Misperceptions Part 1