ESG investing takes into account companies’ records on environmental sustainability, social issues, and methods of corporate governance with the purpose of making investment decisions on an explicitly ethical basis. While this may seem a difficult concept to disagree with, in fact the term has become highly polarising in recent times, facing staunch criticism from both sides of the political divide, particularly in the US. The right accuses it of being ‘woke’, and has actually recoiled against the once-growing trend to the extent that companies are now being forced to ‘greenhush’ - downplay their environmental commitments to avoid appearing progressive. Meanwhile, many on the other side of the political divide argue that existing ESG strategies do not do enough to address ethical issues. Moreover, there is increasing debate as to whether ESG investing offers the financial benefits which it claims.
The main financial argument in favour of ESG investing is that by investing in companies with strong ethical records and sustainable business practice, investors are shielded from the risks that come with the potential legal scrutiny and economic sanctions which loom over companies which do not do well in ethical metrics. This makes ESG investing safer in the long term, at least in theory. However, this strategy is also inherently subject to certain pitfalls: for example, a key tenet of investing is to diversify - i.e. own shares in a wide range of different companies and industries to protect against downticks in any given one of them - but ESG inhibits this by preventing investment in certain industries which are considered unethical such as tobacco and gambling.
Nevertheless, research has shown that most ESG investors’ primary concern is to facilitate a positive impact on society, rather than the bottom line alone, and in fact many would be willing to accept reduced profits in exchange for better ethics. The issue is that people have different moral standpoints on different topics, and there is no unifying framework which standardises ESG criteria. This means that the ESG label often fails to provide moral reassurances, and many consider it more of a PR move than a real call to action. One reason for this is that ESG funds may discriminate by industry alone, meaning that companies can be included despite significant controversy being attached to them: one of the most influential ESG ETFs, the Vanguard US ESG ETF, includes both Amazon (which has been called out for providing poor conditions for workers) and Eli Lilly (which gained notoriety for exponentially raising insulin prices) among its largest holdings.
So is ESG investing actually worthwhile? It depends how it’s done. Given the lack of regulation surrounding its use, the ESG tag is not inherently informative. Instead of blindly trusting it, investors should independently research the criteria that have gone into awarding it, and determine whether they align with their own moral values. At its best, ESG investing has the potential to provide assured returns on investments and a clear conscience, but it is important to separate truly ethical business from simple greenwashing and PR.