• What is ESG investing, and why it matters to investors
  • But ESG investing has received some backlash recently
  • We explain the case for ESG, and why investors may want to stick with it

 

If you’ve been dabbling in stock investing, you would have heard about responsible, sustainable, or green investing. Some people dub it ESG investing; but whatever you call it, it seems like everyone’s talking about it.

ESG investing is basically an investing strategy that looks at making money in a way that feels right to you.

There are really a few ways to do this:

1/  Negative Screening: This is where you avoid investing in companies that are involved in activities you don’t agree with, like tobacco or gambling.

2/ Positive Screening: This is the opposite. You actively seek out companies that are doing good things, like reducing their carbon emissions or giving back to the community.

3/ Impact Investing: This is all about actively putting your money into companies that are making a positive impact on the world, like those working on renewable energy or healthcare.

Now you might be wondering if ethical investing is actually going to hurt your wallet.

Well, multiple studies have shown that it doesn’t necessarily mean lower returns. In fact, a lot of ethical investment options have performed just as well, if not better, than traditional ones.

Why bother with ethical investing?

Besides potential profits, it’s a way to put your money where your mouth is. If you care about things like clean energy or fair labour practices, ethical investing lets you support those causes with your investments.

But ethical investing isn’t without its challenges.

With so many different opinions on what’s ethical, it can be tough to find investments that align with your values. And sometimes, companies might not be as ethical as they claim to be (which is called greenwashing).

In addition, some now believe that investors are relying too much on rating agencies to tell them how companies are doing on the ESG front.

And that gives rise to another issue – conflict of interest. Although these ESG rating agencies are usually paid for by investors, some of them also offer consulting services to the companies they’re rating.

 

The Tesla incident

Some say ESG ratings can also be a bit opaque.

This was highlighted in 2022 when financial rating agency, S&P Global, sparked controversy by giving Tesla a lower ESG score compared to Philip Morris, the maker of Marlboro cigarettes.

S&P removed Tesla from its S&P 500 ESG Index, citing concerns about workplace-related issues. That decision caused uproar in the market at the time, and drew strong criticism from Elon Musk who called ESG “a scam”.

Tesla was reinstated into the index in 2023 after the company provided extra disclosures regarding its hiring policies, climate-related risks, and supply chain strategies.

A few weeks ago, our friends down at Bloomberg Intelligence peeked through the 15 biggest ESG-focused funds in the US and found something interesting: nine of them have a piece of Tesla, while the other six are steering clear of the stock.

“In conversations with people, Tesla’s ESG status depends on who you ask,” said Shaheen Contractor, senior ESG analyst at Bloomberg Intelligence.

“Some favour the company based on its environmental prowess, while others question its governance credentials.”

 

Politics and backlash against ESG

As you may have read, there has been a bit of a backlash against ESG lately. So why, where, and how did this begin?

It all started in January 2021, when Blackrock’s big boss Larry Fink shot out his yearly memo to clients. In it, he told clients that Blackrock was now all about ESG.

“We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity,” Fink wrote.

The backlash soon came, as investors found that there’s actually no clear rules to govern anything related to ESG.

People started calling ESG-investing the Wild West, because anyone can say they’re green or socially responsible without much oversight. And those glossy reports companies put out were not always telling the full story.

People also thought that ESG had become not just about the planet anymore. It had started to touch on all sorts of hot-button issues, like discrimination.

And… that was exactly the point where politicians came in to muddle the picture.

Far-right US Republicans gave BlackRock and Larry Fink a hard time, saying he’s pushing his own agenda with other people’s money. The Republicans promised to pass laws against ESG, declaring a war on “woke capital”.

Up to this moment in time, lawmakers have adopted anti-ESG rules of one sort or another in about 20 US Republican-dominated states.

In New Hampshire (NH), some Republicans are even taking the fight against ESG to the next level.

Earlier this year, they’ve pushed for a law that says any NH government agency investing state cash can’t give any money to fundies who consider ESG metrics when making decisions. Basically, if this bill passes, it would make it illegal for the state to invest in anything ESG-related.

“The pursuit of ESG goals may result in suboptimal investments that fail to meet the fiduciary obligations that state entities investing taxpayer and beneficiary funds owe to their investors,” said New Hampshire Governor, Christopher Sununu.

Yet, other opponents of ESG are also saying that just because you’re investing in ESG, doesn’t necessarily mean you’re making a big impact.

Their main argument is that, yes sure investors care about ESG, but it’s often just looking at simple ratings instead of digging deep into a company’s practices.

 

Now… the case for ESG

Despite all that, there’s little doubt that capital market investors are increasingly factoring in ESG metrics into their investment decisions.

About 9 in 10 asset managers surveyed by J.P. Morgan believe that integrating ESG analysis into their investment strategy will improve long-term returns.

The bank also said that companies with high ESG ratings seem to have a leg up in the competition game, thanks to better employee morale and management teams. 

Plus, those companies tend to pull in better returns than those which don’t factor in ESG. Bonds with higher ESG scores are also showing stronger cash flow metrics too, said J.P.

Asset manager Robeco Australia also chimed in, saying that half a century of academic research has found that in most cases, companies that apply ESG principles tend to be higher quality and financially superior.

According to Robeco, study after study have shown that corporate results benefit from integrating ESG into operations and decision-making.

“Intuitively, what works for individual companies should also work for investment portfolios,” said the note from Robeco.

Robeco also noted that investors these days are increasingly concerned with contributing positive real-world impact in addition to reducing risks, preserving capital and capturing alpha returns.

However, it warns that investors need to be on the ball when it comes to picking the right ESG indicators before diving in, to understand how each one plays out in different sectors.

“For example, environmental indicators such as carbon emissions are more meaningful for energy-intensive industrial manufacturers than for service industries or the financial sector.

“And as always, it matters whether these material indicators are priced in by the market or not.”

 

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