Over the last few decades, ESG has moved from a niche investment strategy to an area that more investors are considering. Yet, there are still plenty of myths about what ESG means and how it affects investors.
ESG investing means taking environmental, social, and governance factors into consideration, alongside financial ones, when you’re making investment decisions. It can be used as a way to align your investments with your values.
For example, when you go grocery shopping, you might consciously choose products that you know are free-range or select companies that pay their workers fairly. ESG investing takes a similar approach to selecting investments.
So, here are four myths that may have put you off ESG investing in the past, and why they don’t ring true.
1. ESG investing means accepting lower returns
First, it’s important to note that investment returns cannot be guaranteed, whether you’re including ESG factors or not.
However, the myth that ESG investing means accepting lower returns isn’t true, and the data proves it. The UN Principles for Responsible Investment (PRI) has pulled together a range of analysis to demonstrate this.
For example, one study looked at the historical returns and ESG ratings of more than 13,000 publicly traded companies between 2013 and 2021. It found that companies with a better ESG ratings generally outperformed those with lower ratings.
Similarly, research that examined the performance of the 10,000 largest global companies between 2016 and 2022 found that companies that pursue stronger growth and profitability while improving ESG performance deliver superior shareholder returns.
That’s not to say that every ESG investment opportunity will deliver returns or is right for you. It’s still essential that investors consider their risk profile and goals.
2. ESG investing is about climate change
Tackling climate change is a major challenge that ESG focuses on as part of the environmental pillar. However, that is far from all it covers.
Indeed, under the environmental term, investors might also consider natural resource conservation, waste management, and efficient energy use.
As part of the social pillar, investors evaluate a company’s relationships with internal and external stakeholders. Topics could range from the business’s health and safety practices within the workplace to whether they give back to the communities they operate in.
Finally, governance covers how a company is run, such as whether it’s accountable to shareholders, if its accounting methods are transparent, or diversity when hiring for leadership positions.
3. ESG investing limits your investment opportunities
Depending on the strategy you take, there may be some truth to this myth.
Some investors choose an approach called “negative screening”. This is where they’d exclude companies from their portfolio if they don’t align with their ESG values. For example, they may not invest in fossil fuel companies if climate change is a key part of their ESG criteria.
So, in this case, an investor would be ruling out a portion of the market.
However, this isn’t the only way to make ESG issues part of your portfolio. An alternative approach would be “positive screening”, where you allocate a portion of your portfolio to ESG issues. In the above example, rather than excluding oil companies, you might actively invest in those that are developing renewable technology.
4. ESG investing is a fad
ESG investing may seem like a relatively new phenomenon. Yet, it might go back further than you expect.
Some argue that ESG investing’s roots go back to the 18th century, when the Religious Society of Friends, also known as Quakers, in Philadelphia prohibited members from investing in the slave trade on ethical grounds.
The modern approach started to emerge at the turn of the 21st century. Indeed, the UN Global Compact launched the PRI in 2006 to provide a framework for institutional investors that were incorporating ESG into their investment processes.
This was seen as a turning point, as it highlighted that funds can, and arguably should, consider non-financial factors when they’re assessing the long-term potential of investments.
Contact us to talk about your investments
If you’d like to review your current investment portfolio with ESG criteria in mind, or would like to discuss if ESG investing might be right for you, please get in touch to arrange a meeting.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.