ESG Investing: The New Frontier?

ESG Investing: The New Frontier?

June 06, 2022

Environmental, Social, and Governance (“ESG”) investing is a brand on the rise in the United States and around the world. A 2018 study from Harvard University’s Kennedy School of Government found that claims of “ESG” investing now account for nearly $30 trillion, more than one-fourth of all assets under professional management worldwide.[i]

The rising prominence of the “ESG” brand is reshaping requirements for corporate metrics and reporting disclosure. Stakeholders are demanding to learn more about a company’s rack record on environmental performance and internal/external stakeholder engagement. Business enterprises are seeking to demonstrate that their environmental and social policies build net shareholder value. But what IS “ESG investing”?

A broad umbrella that encompasses many diverse values-based investment (“VBI”) goals and strategies, “ESG” is a descriptor that encompasses different – sometimes very different - things to different people. [ii]

  • Socially Responsible Investing (‘SRI’) is the ‘negative’ screening out of companies who make products or provide services contrary to an investor’s values – that is, weapons or drugs or human trafficking or any of a myriad of products and services dis-favored by various special-interest groups. Seeking a superior investment return is not necessarily a SRI investment objective.

 

  • Sustainable development investing seeks to “screen in” to investment strategies companies that can be expected to deliver superior financial results because they maximize value creation and minimize wastage through superior environmental practices and stakeholder engagement.

Twenty years ago, I delivered keynote remarks on Financial Issues in Sustainable Development[iii] in Durban, South Arica, while in the country as an American Bar Association delegate to the 2002 World Summit on Sustainable Development in Johannesburg where my Environmental Dispute Resolution book was first released[iv]. At that time, SRI investing was the primary approach to VBI investing in the United States. The Dow Jones Sustainability Index (DJSI”)[v], which seeks to identify the superior “ESG” companies across the Dow’s 60 sectors, had just been launched a few years before; for reasons beyond the scope of this blog, DJSI investing remains largely unknown to US investors.

Over the past twenty years, the language of sustainable development became popular among investment firms. Some simply rebranded longstanding SRI and other investment strategies as “ESG” investment strategies. An ongoing proliferation of value-based investment funds and strategies named (and re-named) “ESG” has made it difficult to know what any particular fund or investment strategy seeks to deliver and to differentiate among them.  For example, some of them screen out ‘bad actors’, while others screen in ‘good actors’, leading to very different investment outcomes.

Now as investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach.[vi]  And, to clarify what the heck may be meant by any claim of “ESG” investing strategy, the SEC announced last week proposed amendments to rules and reporting forms "to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors.” The agency’s announcement states that the proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.[vii]

Benefits to Values-Based Investing

Regardless what you call it, values-based investors may want to seek the recommendations of a financial professional who has experience in this area. Here are some considerations to ponder, if you are contemplating the wide array of ESG-branded investments currently offered to U.S. investors. If living a life authentic to your values is important to you, then that could impact your investment decisions. We can help you deploy your financial resources strategically in alignment with what matters most to you.

ESG, SRI, Sustainability, and other VBI investing encompass a broad range of approaches not just to investment but also to lifetime gifting and estate planning. Some investors want to focus on particular social goals (for example, empowerment of women and girls); others may want to focus on environmental priorities (for example, human contributions to climate change).

Other investors may want to incentivize corporate best practices more broadly around environmental and social governance concerns. Companies that deliver superior organizational performance across the full scope of environmental, social, and financial dimensions might also be likely to deliver superior shareholder returns over time.

Different things matter to each of us. Are you looking for investment strategies aligned with your goals and values? Strategies that incentivize business organizations to make important changes in how they touch the planet and its people? Are environmental and social governance considerations important?

If transformational social, environmental, and economic change matter to you, alongside financial performance, let us tailor suitable wealth management approaches to help you pursue a financially resilient future.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Socially Responsible Investing (SRI) and Environmental Social Governance (ESG) strategies that apply negative screens for non-financial reasons may underperform.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This blog was adapted from an article created by WriterAccess.


[i]   Complete guide to ESG and socially responsible investing (SRI) (cnbc.com).

 

[ii]  For example, Environmental, Social and Governance: What is ESG Investing?, Forbes,https://www.forbes.com/advisor/investing/esg-investing/; ESG Investing 101, U.S. News & World Report,https://money.usnews.com/investing/news/articles/what-is-an-esg-score

[iii] Ann L. MacNaughton, Financial Issues in Sustainable Development (Durban, South Africa, 2002).

 

[iv] A. MacNaughton & J. Martin, Environmental Dispute Resolution: An Anthology of Practical Solutions (ABA 2002), for the first time presenting Environmental Dispute Resolution (“EDR” in a sustainability context.

 

[v]Dow Jones Sustainability Indices - Wikipedia

 

[vi]SEC.gov | SEC Response to Climate and ESG Risks and Opportunities.

 

[vii]SEC.gov | SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices.