ESG Investing: What Is It?

ESG Investing: What Is It?

July 25, 2022

“ESG” or “Environmental & Social Governance” is one of those “ocean phrases” that means something different to everyone who closes their eyes and imagines it. What do you see when you close your eyes and image “an ocean”?  Placid blue-green waters? Towering black-green waves? Blue skies? Stormy weather? The same words mean different things to different people.

The same is true with the increasingly popular phrase “ESG investing”.  What does ““Environmental & Social Governance” mean to you?

 “Socially Responsible Investing” (“SRI”) has been around since the 18th century, when Methodism – a denomination of Protestant Christianity that eschewed the slave trade, smuggling, and conspicuous consumption – resisted investments in companies manufacturing liquor or tobacco products or promoting gambling. SRI ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors. SRI board activism on those issues, on apartheid in South Africa, and other issues led to institutional and legislative change.

Twenty years ago, while serving as an American Bar Association delegate to the 2022 World Summit on Sustainable Development, I addressed a side conference of lawyers on the topic Financial Incentives for Sustainable Development. At that time, the Dow Jones had just teamed up with Zurich-based Sustainability Asset Management to launch in 1999 the first the global sustainability benchmark, the Down Jones Sustainability Index (“DJSI”), which tracks the stock performance of the world's leading companies in terms of their economic, environmental, and social performance.

Over recent decades, a broad range of very different values-based investing strategies have all begun to label themselves “ESG investment strategies”.  That label now is applied to negative screening strategies, originally known as “Socially Responsible Investing” (“SRI”), as well as to positive-screening strategies like the DJSI that seeks to select from among the world’s top performers across all business sectors, as well as sector-specific strategies that seek to encourage corporate innovation in narrow fields such as ‘alternative’ energy, for example.

Some but not all so-called ESG investment strategies seek superior financial performance profit; others accept less financial performance in return for either refraining from unloved products to focusing on narrow market niches. But, as social and environmental urgencies increasingly are recognized as priorities by investors, the phrase itself – whatever it may mean – has become increasingly popular.

"A record $649 billion poured into ESG-focused funds worldwide through Nov. 30, up from the $542 billion and $285 billion that flowed into these funds in 2020 and 2019, respectively, the latest Refinitiv Lipper data shows. ESG funds now account for 10% of worldwide fund assets." – Analysis: How 2021 became the year of ESG investing, Reuters.

In February 2022, Morningstar removed the ESG tag from more than 1200 funds in their classification system, roughly one in five, over concerns that ESG asset managers were making false claims their fund was doing the planet and its inhabitants good.  Morningstar’s correction is good news! It signals awareness of what now has become known as ‘green-washing’ through the ESG label.

Work with a financial professional

To explore ESG investing, work with a knowledgeable financial professional who has fiduciary responsibilities to you, and can help you determine which ESG investment strategies may offer an approach that is aligned with your values and also with your investment objectives, time frame, and financial risk tolerance.


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.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

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

This article was prepared by Fresh Finance.