Finance
Who Supports ESG Investing And Who’s Against It (And Why)
Published
1 year agoon
By
James White
With President Biden’s veto of the Congress’s bipartisan joint resolution, ESG has been one of the hottest news stories in the financial world. Beyond the politics of it, proponents and opponents of the ESG push have their own reasons for staking out their positions. Would it surprise you to learn that self-interest plays a role?
What is ESG and how does it work?
At its most basic core, ESG is merely an extension of placing portfolio restrictions based on subjective, rather than accounting, factors.
“Explained in simplest terms, ‘ESG’ stands for environmental, social and governance which is an investing strategy that takes into account a business’s environmental and social risks as part of a broader financial analysis,” says Rob Reilly, finance faculty at the Providence College School of Business and investment consultant at North Atlantic Investment Partners in Boston.
How you use ESG will depend on how you define ESG. While there remains no consensus about what the details of ESG are in measurable terms, there is growing agreement on what the concept itself means.
“The basic theory behind ESG investing is that a company’s returns may be impacted by environmental, social, and governance factors in addition to traditional financial factors,” says Michael James Maloney, a partner at Felicello Law, P.C., in New York City. “The most common environmental issues cited are the effects of climate change like floods or fires. ESG social factors include the impact of a company’s actions on ‘stakeholders’ like employees and communities. ESG proponents argue that fiduciaries should consider the company’s actions regarding ESG factors when deciding whether to invest in that company’s stock.”
Structurally, it’s a relatively straightforward process to integrate ESG into a portfolio management system. You can treat it as an asset class or one of several criteria for stock selection.
“ESG is primarily a risk management tool,” says Andrew Poreda, VP and ESG senior research analyst at Sage Advisory Services in Austin, Texas. “ESG assessments better help corporations and investors assess risks that have previously been underemphasized by various stakeholders. It can also be used as an avenue to identify opportunities in a constantly evolving landscape.”
What is the most important part of ESG?
If you accept the theory of ESG, then you can understand why people believe it’s critical to ensuring future prosperity. What, then, is the most important part of ESG?
“ESG investing primarily aims to integrate green and socially responsible factors into a portfolio to generate long-term positive impact,” says Andrew Pickett, Attorney at Andrew Pickett Law based in Melbourne, Florida. “By considering a company’s environmental, social, and governance practices, investors can make more informed decisions about where to invest their money.”
In marrying your value system with your investments, the idea is that ESG will make you (and the world) better off.
“The main purpose of ESG is to provide investors with a framework to assess the potential performance and impact of their investments in an ethical and sustainable way,” says Linda Chavez, founder & CEO of Seniors Life Insurance Finder in Los Angeles. “This type of investing seeks to benefit not only shareholders, but also other stakeholders such as the environment, society, customers, employees, and local communities.”
Who supports ESG and why do they support it?
In practice, though, ESG does not differ from any other movement or sales pitch. You’re either in it (or against it) because of your faith or because of your perceived financial benefit. This represents a classic case of “politics makes strange bedfellows.”
“ESG is considered to be a progressive cause,” says Maloney. “Proponents argue that traditional shareholder capitalism is too narrowly focused on returns to shareholders while ignoring negative impacts on non-shareholders. ESG is offered as an alternative that expands the scope of issues considered by fiduciaries.”
“ESG factors are supported by a wide variety of investment professionals,” says Matt Bruce, president of Pointer Financial Group in Wauwatosa, Wisconsin. “ESG is supported by the companies that stand to benefit the most from ESG, specifically those who have strong ESG scores. Additionally, many fund companies charge higher expense ratios for ESG investments and stand to profit from the widespread adoption of ESG funds. Many political and non-profit organizations support ESG investing principles with the belief that ESG advocacy efforts will push companies to adopt policies more in line with their organizational goals. Finally, many investors, especially younger generations, support ESG principles as it gives them an opportunity to do good and avoid harm with their investment dollars.”
The first thing you should do here is to create a list of all those who promote ESG to see if you can discern similarities and differences between them. This will help you place them in either the faith (a.k.a. politics) or financial categories.
“In general, the investment industry, investors, climate advocates and Democrats are supportive of this but for potentially different reasons,” says Bud Sturmak, the head of impact investing and a partner at Perigon Wealth Management in New York City. “The investment industry supports it because integrating ESG factors into the investment process can lead to prudent risk management and potentially better retirement outcomes for millions of Americans. Investors are increasingly demanding ESG as they are asserting their right as consumers to put their investment dollars into companies they believe in. Climate advocates likely see this as an opportunity to leverage finance as a tool to accelerate the transition to a low-carbon economy and prevent a climate catastrophe. Democrats are likely supportive for all of these reasons.”
By focusing on ESG as it pertains to investing, proponents have crafted a way to combine both faith and financial objectives into one package.
“Supporters of elevating ESG factors in retirement investments include a variety of organizations, ranging from environmental groups to labor unions,” says Chavez. “They advocate for the inclusion of ESG investments in retirement plans because they believe it is a way to promote sustainability and ethical investing while also providing better risk management, lower costs, and improved returns. In addition, proponents argue that it is important for employers to take into account the long-term effects of their investments on the environment, society, and local communities. By encouraging ESG investment, employers are taking a responsible approach to their retirement plans that can benefit both their employees and society as a whole.”
Indeed, it’s easier to sustain the faith if you add the financial element to it.
“Many investors, particularly those who are socially and environmentally conscious, support efforts to elevate ESG factors in retirement investments,” says Andrew Latham, director of content of SuperMoney.com in Raleigh, North Carolina. “They argue that such factors can help identify long-term risks and opportunities and align investments with personal values. Additionally, many companies are increasingly prioritizing ESG factors, which can help drive financial performance over the long-term. There is a growing body of research that suggests that incorporating ESG factors into investment decisions can lead to better investment outcomes. Several studies have found a positive correlation between ESG performance and financial performance. For example, a study by Harvard Business School found that companies that focused on sustainability outperformed their peers in terms of stock price and profitability. Another study by MSCI
MSCI
Who does not support ESG and why do they advocate against it?
It should be noted regarding the research cited above that correlation does not imply causation. Further, the research referenced was conducted prior to the latest period, where ESG investment performance has lagged. A more recently published article in the Harvard Business Review states not only do ESG investors suffer from underperformance, but they may also not be receiving the ESG value they had hoped for.
Once again, you’ll want to make a list of ESG opponents to see on which side of the faith/financial scale they fall. It may be a sign that the arguments of this side of the debate haven’t fully matured, but it seems “cause,” rather than “money,” is a much more vibrant motivator.
“Republicans and aligned groups are vehemently opposed to ESG,” says Poreda. “They view ESG as a subversive way to enact political and ideological goals through investing. ESG is seen as part of a bigger culture war where climate activism and ‘woke-ism’ are being pushed to a naïve general public through different entities (education system is another example), basically bypassing the governing bodies in our country that are supposed to be shaping these issues through legislation. Banning ‘ESG’ in ERISA plans is just one step to take this perceived power grab out of the hands of asset managers. Another interesting argument against ESG is that it goes against ‘free markets’ and capitalism. Whether it be preventing investors from utilizing ESG factors or banning certain asset managers from managing money (like in Texas) due to a supposed boycott of the oil and gas industry, the logical observer would say the group who is putting heavy-handed stipulations in place is the anti-capitalist in the room.”
That’s not to say money doesn’t play a role, although its part may be less direct (i.e., unlike for ESG funds, there’s no talk about charging premium fees for non-ESG funds). Ironically, both sides make a play for better long-term returns.
“Some opponents of elevating ESG factors in retirement investments argue that it could limit investment options or reduce returns,” says Latham. “They may also argue that considering ESG factors could conflict with a fiduciary’s duty to act in the best financial interests of plan participants. Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.”
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. “In addition, many investors, who want to maximize growth in their portfolio, would rather not have ESG investments offered which may or may not benefit their retirement savings in the long run. Finally, many companies pressured to adopt policies they don’t agree with, oppose ESG classifications as they feel the somewhat narrow scope of ESG categorization doesn’t fairly represent their company’s products or corporate practices.”
You could say that those who are suspicious of ESG have faith they can achieve greater investment success by simply ignoring it.
Those include “people who believe the government should not be involved in choosing allowable investments,” says Lyle B Himebaugh, managing partner at GGA Retirement in Stamford, Connecticut. “Knowledge is power. There is no standard ESG benchmark. The people who do not support ESG are the ones who want to make money.”
In a nutshell, “opponents to ESG argue that consideration of factors undermines corporate competitiveness and will lead to lower returns for shareholders,” says Maloney.
With these differing views and the fact these opinions represent widespread beliefs on both sides of the ESG issue, perhaps the marketplace will be the ultimate arbiter for the ESG concept. Will the idea itself become sustainable, or will it disappear as have other investment fads, or will it ultimately wither away and become a narrow niche like those long-standing portfolio instructions that ban the investment in alcohol, tobacco, and firearms?
Source: Forbes
Candace Cameron Bure breaks down as she admits to ‘shame’ over speaking about depression: ‘Feels so weak’
Street closures start ahead of Biden’s campaign fundraiser in NYC
Baltimore port workers worry about layoffs, jobs after bridge collapse
Massachusetts joins with NCAA, sports teams to tackle gambling among young people
9-year-old attempts to drive to school, crashes into patrol vehicle, officials say
Baltimore Lost More Than a Bridge
King Charles Is ‘Utterly Determined’ to Show Unity Among the Royal Family Amid Health Battles
Los Angeles Theatre Week Provides Access to Affordable Productions
Living with an anti-reunification North Korea – Asia Times
Thousands of phones and routers swept into proxy service, unbeknownst to users
Martha Stewart’s Straightforward 14 Words of Advice for Meghan Markle and American Riviera Orchard: ‘That’s What It’s All About’
Erdoğan’s gain as Turkish vote coincides with Ramadan? – Asia Times
‘Quite on Set’: Drake Bell Slams Nickelodeon’s Response: ‘I Find It Pretty Empty’
Gangs, kidnappings, murders drive Rohingya from camps – Asia Times
When Russian cyber operations targeted the West – Asia Times
Trending
-
Tech21 hours ago
Thousands of servers hacked in ongoing attack targeting Ray AI framework
-
News23 hours ago
Kate Middleton’s Cancer Battle Has Prince William Feeling ‘Helpless and Scared’ — Report
-
News22 hours ago
Bridge collapse brings stark reminder of migrant workers’ vulnerabilities
-
News16 hours ago
Ex-Buccaneers tight end, Rob Gronkowski, visits veterans in Tampa
-
News23 hours ago
Pictured: Scene where Gogglebox and Celebrity Big Brother star George Gilbey, 40, fell to his death in ‘work accident’ with images showing building materials on 35ft warehouse’s roof – as probe is launched and heartbroken friends pay tribute
-
Tech20 hours ago
Event Horizon Telescope captures stunning new image of Milky Way’s black hole
-
News22 hours ago
‘Sister Wives’ Star Meri Brown Reflects on ‘Roller Coaster’ of Grief 3 Weeks After Garrison Brown’s Death
-
News17 hours ago
Should you feed your husband beetroot to have better sex? Mother of four and GP Clare Bailey dispenses her advice