Is ESG investment worth the hype? Industry specialists certainly think so, especially with sustainability becoming increasingly at the forefront of organisational decision-making. Does ESG investing really have the power to change the world? Let’s take a look.
ESG investing: a quick overview
Environmental, social, and governance (ESG) investing is a strategy whereby portfolios are comprised of companies with positive ESG scores. The aim of the investment strategy is to encourage organisations to focus upon areas such as sustainability and responsibility, especially if their operations may usually lead to a negative impact. For instance, the oil giants can improve their ESG scores by channelling their profits into carbon-reducing research and development. Equally, if a company fails to do this, it will be punished with a poor ESG score. As such, many investors find the ESG strategy both empowering and attractive.
Why do some people think ESG investing is a fad?
When ESG first emerged as a concept, it was criticised for its vulnerability to so-called greenwashing. The phenomenon involves organisations making token gestures towards sustainability and social justice in order to cover a multitude of sins. When ESG investing first emerged, there was a lack of transparency regarding how and why companies were selected. This has since been compensated for with a range of strategies. For instance, negative screening techniques compare organisations within a given sector so that the ESG score has meaningful context, meaning ‘false-positive’ ESG scores can be eliminated from the portfolio.
So, is ESG a fad?
The urgency with which the public is responding to climate and social justice challenges is increasing, and this has the potential to be a powerful force. ESG investing represents one of the few available strategies for forcing large organisations to improve their profiles, and many investors seem willing to accept that any change is better than none. As such, ESG investing is here to stay, especially now that there are reliable mechanisms for ensuring that investments reflect the values and ethos of the investor. Not all financial providers will offer this personalised service, however, so – unless working with the right advisor - there is still some distance to be covered before all ESG investments are watertight.
What are the alternatives to ESG investing?
An alternative to ESG investing is socially responsible investing (SRI). There are multiple overlaps between the two approaches, especially as SRI strategies use the same scoring techniques as ESG. However, because it has an exclusionary-only approach, SRI is more limited in its options. For instance, an investor may choose to exclude all oil companies, even if they are making a positive impact in some areas of their operations. As such, SRI investing tends to be slightly less diversified, and the portfolios more limited. Furthermore, SRI rules out using investors as behavioural influencers, which is one of the main attractions of ESG.
Far from a fad, ESG is one of the fastest growing areas of investment, and companies are starting to take note. However, as with any emergent investment strategy, ESG benefits from comprehensive and professional support. For more information about empowering your investments, have a chat with one of the wealth management and investment specialists at Arlo Group today.