In an article by Ross Levin at Accredited Investors Wealth Management, the complexities of ESG investing are explored, as well as its differences from other responsible investing approaches. ESG, which stands for environment, social, and governance, is a buzzword in the finance world, and while it is supposed to offer an objective way of assessing companies, it is important to recognize its limitations and distinctions from other investment strategies.
Levin emphasizes that ESG is not the same as socially responsible investing (SRI). SRI, which has been around for a long time, is about excluding specific business categories based on an investor's values, such as tobacco or fossil fuels. However, ESG may still include companies in industries one might prefer to avoid. Levin explains, "ESG in this example is the Schrodinger's cat of investing."
ESG is also not synonymous with impact investing, which aims to generate both measurable differences in areas like climate and a financial return, with the impact as the primary consideration. Impact investing often involves private investments, allowing for more patient and long-term, sustainable approaches.
Levin further highlights that ESG investing is not without trade-offs. While in theory, companies that perform well should also have good ESG scores, studies have not provided clear evidence of this. The best investment results might come from combining ESG with other technical factors.
Additionally, ESG investing is not the same as greenwashing, and the field of ESG investments is continually evolving. For instance, Tesla was recently removed from the ESG index (May 2, 2022) due to poor governance and social scores. ESG is a framework for company governance and investment, but it is not static.
Levin also points out that ESG investing is not necessarily better at earning more and giving away more. Expressing one's values can go beyond investing, such as through spending and charitable giving. Some investors may prefer to grow their investments as much as possible to maximize their philanthropic impact.
Lastly, Levin states that ESG investing is not insignificant. Regardless of one's stance on ESG, there is increasing pressure on companies to be both good citizens and high-performing businesses. While there is some evidence that the two aspects are complementary, there is more evidence that they are not mutually exclusive. This leads to ongoing debates about whether those investing on behalf of others, such as pension funds or retirement plan options, are meeting their fiduciary duties by investing solely through the ESG lens.
In conclusion, Levin asserts that there are many ways to align one's values and investing, with ESG being one of them. However, ESG investing is a complex and evolving strategy that requires a nuanced understanding of its principles and limitations.
1 Adapted from source: Levin, Ross and Star Tribune. "Know what ESG investing is — and isn't." Star Tribune, 11 Mar. 2023, www.startribune.com/know-what-esg-investing-is-and-isnt/600258025.