What is ESG Investing and why it’s gone mainstream?

Put your money where the environment is. ESG investing has gone mainstream, according to a 2019 Morgan Stanley and Bloomberg survey. In their survey, more than 89% of investors predicted ESG investing is now a “fixture of the investment community moving forward.”

What is ESG investing?

Most simply, ESG investing is any investment that may be informed by environmental, social or governance considerations. Some different terms describe it. It goes beyond the predecessor term Socially Responsible Investing (SRI), which sought to meet certain standards. To differentiate ESG from Impact Investing, think of Impact Investing as companies that actually generate ESG benefits. ESG investing as an umbrella term covers six principles that the United Nations (UN) established, known as the Six Principles for Responsible Investing.

ESG investing, while broad, may be broken down into its component parts. For environmental concerns, natural resources are examined: carbon emissions, energy efficiency, waste, water and raw materials. Under the social category, it covers anything related to people: safety, unionization, diversity, and human rights. With governance, the term includes company transparency, diversity in leadership, and accountability for shareholder awareness.

Why are people investing?

Investors are putting their money into ESG investing for three primary reasons: because ESG investing has grown, people are more aware of issues and this type of investing reflects their values. Globally, sustainable asset investments hit $288 billion in 2020, and Jefferies found 25% of assets were invested in ESG in 2018.  Several factors have driven its growth, including increased demand, more usage of data and analytics, expanded media coverage, more customized product supply, and non-profits investment processes in the limelight.

People are also investing because ESG concerns are growing in people’s awareness. For social and governance issues, the coronavirus and Black Lives Matter movement have made people more conscious. With the environment, major names in finance are recognizing the need for protection, such as reducing climate change. “Climate transition presents a historic investment opportunity,” said Larry Fink, BlackRock’s CEO in his 2021 letter.

ESG investing reflects people’s changing values. “At its core, ESG investing is about influencing positive changes in society by being a better investor,” said Hank Smith, Head of Investment Strategy at The Haverford Trust Company. Millennials in particular are concerned about climate. Gallup found 67% see climate change as a major threat. 

Who is offering ESG investments?

Major banks and companies now have ESG investments, like J.P. Morgan. UBS noted in 2018 their assets under management in this space tripled. In particular, there are now dedicated impact investment firms, with Investopedia naming the top five as Community Reinvestment Fund USA, BlueOrchard Finance SA, The Reinvestment Fund, Vital Capital Fund, and Triodos Investment Management. These firms are ranked based on assets under management (AUM), the total investments market value being managed. The non-profit Impact Assets also publishes a sortable annual showcase of the top 50 Impact Investment Fund Managers.

Companies are identified by ESG research firms. According to Forbes, JUST Capital, Bloomberg, S&P Dow Jones Indices, Refinitiv, and MSCI are some top ESG research companies. These companies generally use a 100-point scale based on different criteria and weighting schemes.

Companies can also be identified as ESG supporters through third-party certification or use of standards. A major framework companies use is the Global Reporting Initiative (GRI). GRI sets sustainability standards used by 80% of the 100 largest firms. Other top certifications or standards include B-corp certified, Global Impacting Investing Rating System (GIIRS) funds, and International Finance Corporation’s Operating Principles for Impact Management. 

You can also do a quick search on Yahoo Finance for ESG rankings, as shown in this sustainability ranking for Amazon ESG.

Greenwashing changes and cautions

With the growing popularity of green investing, there also has been increased concerns over what firms are actually benefiting the ESG space. In response, the ESG investing landscape has changed recently. In October of last year, the US Department of Labor issued a new law limiting ESG in retirement plans. It dictates that plan fiduciaries must choose strategies solely on financial performance, and not reference ESG factors.

With ESG investing you can still do, it is important to not let your emotions dictate your decisions. One issue is “greenwashing,” companies making their practices out to be more sustainable than they really are to try and improve their public image. Companies should be aware of taking their claims too far, as the Securities and Exchange Commission (SEC) is looking to find ESG-related misconduct. On March 4, 2021, the SEC announced its Division of Enforcement will now have a Climate and ESG Task Force. “Climate risks and sustainability are critical issues for the investing public and our capital markets,” Acting Chair Allison Herren Lee said. To help prevent issues, the task force plans to develop a framework for disclosures to better assess risks in sustainability investing, including climate change.

Conclusion

ESG investing is a growing area and there is much to learn. If you’d like to learn more, be sure to check out the upcoming GreenFin 21 online events on April 13-14, 2021, billed as the biggest ESG event aligning sustainability, finance and investment communities.

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