Environmental, Social and Governance (ESG) Investing takes socially responsible investing to the next level. ESG looks beyond simply social issues: it looks deeply into the environmental, social and the governance imprints of a company. It involves evaluating each company on: their environmental impact; how they treat their employees; the quality of their relationships with local communities, customers and their supply chain; and corporate governance policies and practices, including diversity and equality.
Why should we take ESG investing into consideration? The real question is: why shouldn’t we? The myth that investing in ESG companies may forfeit returns is simply false. A study conducted by Market Watch in the first quarter of 2020 showed that 10 out of 12 ESG focused index funds outperformed the S&P 500 while 11 out of 11 non-US ESG focused funds outperformed their respective international benchmarks. The Harvard Law School Forum on Corporate Governance recently observed that “improved governance can enhance long-term share-holder returns.” Additionally, a recent study by Arabesque found that S&P 500 stocks ranking in the top quartile for ESG attributes outperformed those ranking the bottom quartile by 25% in the five years running from 2014-2018.
As employees, we need to insist that more of our 401(k), 403(b) and other retirement and pension savings plans provide ESG investment choices. The U.S. is currently moving in the opposite direction to the U.K. and EU, who are promoting ESG investing. Fitch Ratings, a firm that rates the debt and equity offerings of companies worldwide, stated that “While these differing approaches are not expected to immediately affect investment managers, pension plans and/or the institutions sponsoring these plans, we anticipate that they will translate into differing investment considerations, risk and potential returns over the long term.” However, in June 2020, the U.S. Department of Labor proposed that all retirement plans governed by ERISA prohibit the use of those assets for furthering ESG objectives. And in August 2020, a second proposal was made that required plans to cast shareholder votes only on issues that have a direct economic effect on the retirement plans. Since retirement and pension plans contain the majority of the investing dollars in the market, the DOL’s proposals work against the goals to have a safer and healthier environment in which we live. In contrast to the DOL’s approach, “regulations in the U.K. and EU promotes the integration of sustainability and ESG concepts into financial decision-making, which has become a more common and/or formalized consideration for pension and retirement fund managers.”, according to Fitch.
With more than $15 billion being moved into ESG funds in the first half of 2020, we need to speak louder and have the right to invest our money in the manner in which we choose.
In these times of financial hardships, placing your money in companies that promote these values is an important statement. It says that we support those companies that work toward the world we want to leave for future generations. While donating to causes is one way to create impact in these times, ESG Investing gives us another way to put our money to work in service of our values. It is truly something to reflect on when evaluation who and what actions we are supporting with our investment dollars.
