Why not to invest in ESG?
Another objection to investing on ESG principles is that because so many investors are attracted to companies with high ESG scores, the prices for such securities are inflated. Thanks to their popularity, their past performances have been strong, but their future returns will be weaker.
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
The results show that ESG controversies significantly reduces firms' overall investment efficiency, and such adverse impact is manifest in underinvestment inefficiency. Further analysis indicates that such a negative effect is more pronounced in firms with larger size and higher analyst coverage.
- Environmental. Conservation of the natural world. - Climate change and carbon emissions. - Air and water pollution. ...
- Social. Consideration of people & relationships. - Customer satisfaction. - Data protection and privacy. ...
- Governance. Standards for running a company. - Board composition. - Audit committee structure.
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
| Pros | Cons |
|---|---|
| Can help investors diversify their portfolio | ESG funds may carry higher than average expense ratios |
| May reduce portfolio risk | ESG investing is still a fairly new concept and there isn't a ton of reporting on performance |
In a line used by proponents, those in opposition to the ESG movement also believe there is substantial support behind them. “ESG investments are often opposed by conservatives who feel that ESG investments favor one political ideology and pressures companies to adopt 'woke' policies they don't support,” says Bruce.
Many academic studies have investigated the relationship between ESG ratings and stock returns. They offer no conclusive evidence that investments that are based on ESG criteria outperform those that are not. Some studies find that good ESG performers earn higher stock returns while other studies report the opposite.
With accusations of “greenhushing,” “greenwashing,” and “woke capitalism,” the three letters “ESG” have become synonymous with backlash. The rhetoric is simple if one wishes to undermine economic decisions that encourage ethical behavior as a primary concern.
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
Who is pushing ESG?
Over the past decade or so, ESG edicts became embedded into corporate America's ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon ...
Since ESG funds invest in companies that utilizes resources sustainably, is sympathetic to the well-being of its employees, stakeholders and society and is committed to clean governance, the potential risks are reduced.
In its basic form, greenwashing uses manipulation and misinformation to garner consumer confidence around a company's environmental, social or governance (ESG) claims.
ESG refers to the environmental, social, and governance factors that investors measure when analyzing a company's sustainability efforts from a holistic view.
Too Much Exuberance
This has led to a number of problems, including: Inflated prices: ESG-labeled investments are often priced higher than comparable investments that are not labeled as ESG. This is because investors are willing to pay a premium for the perceived environmental and social benefits of ESG investments.
In recent years, Telsa has been accused of allowing racial discrimination and poor working conditions at its Fremont Factory, as well as lacking a low carbon strategy and codes of business conduct. The claims are so troubling that Tesla was removed from the widely accepted S&P 500 ESG Index.
ESG Risks are those arising from Environmental, Social and Governance factors that a company must address and manage. These risks are a combination of threats and opportunities that can have a significant impact on an organisation's reputation and financial performance.
Companies with a low ESG score are thought to have the worst environmental, social, and governance impacts. Undesirable ESG scores have also been linked to rising poverty levels in the communities where the firm operates, as well as poor employee mental health.
While there are many benefits to ESG investing, there are also disadvantages. The primary one is that they can reduce profits. ESG investments aren't like other projects where returns can be clearly quantified. It can be difficult to translate these investments and their returns on financial statements.
ESG investing for LGBTQ+ diversity and inclusion
The companies included in the index have policies supporting equality for gender and sexual orientation.
What's behind the ESG investment backlash?
Much of the backlash has been focused on the “E” in ESG, and in particular the incorporation of climate change considerations into investment decisions—though some social issues, especially company efforts to address anti-LGBTQ+ and specifically anti-transgender bias, have come under attack.
Florida and Texas lead the state-level push against ESG
Under the direction of Gov. Ron DeSantis, Florida is leading the movement against ESG initiatives, looking to punish asset management firms who consider environmental, social and governance principles or have ESG funds.
While there is some evidence that companies with high ESG ratings perform better financially, it is also possible that these companies are simply better managed overall and would perform well even without ESG initiatives.
A lot of their underperformance is thanks to missing on just a handful of tech stocks, according to a report from Morningstar. Last year, 82 out of Morningstar's 146 sustainability indexes underperformed their non-ESG equivalents, making 2023 the second worst performing year on record, after 2022.
89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.
