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Whether you call it impact investing, socially responsible investing or ESG-investing, the majority of investment professionals worldwide believe that environmental, social and governance (ESG factors) should be considered when making investment decisions. You're busy - and you haven't explored ESG-investing yet. Here are some reasons why you may be hesitating.
"ESG-investing doesn't perform as well as traditional investing."
Research has proven otherwise. Morningstar Research determined there is no performance penalty associated with ESG-investing. Deutsche Asset Management and the University of Hamburg agreed when they aggregated the findings of over 2,000 studies.
"I already give to charity."
Impact investing is different - it is about using capitalism as a force for good. Now that 70% of asset managers are already using ESG metrics in their analysis (even if they don't use ESG in the fund name), companies are reporting information they never disclosed, or even tracked, in the past. ESG rating agencies have the potential to not simply identify "good" and "bad" companies, but to increase transparency, help companies identify gaps and raise the bar for standard business practices worldwide.
"There is not enough ESG data available."
In 2011, 20% of S&P 500 companies published sustainability reports. In 2017, that figure rose to 85%. Increased disclosure means more ESG data can be utilized to construct similar indexes (in terms of composition, risk, and return) to non-ESG index equivalents. While many ESG indexes are still fairly new, lack of history is mainly an issue for actively managed funds where an asset manager is picking individual stocks and bonds. For indexes, the index provider's experience (such as the S&P Dow Jones Indices), methodology and understanding of the market exposure you want to capture are most important.
"ESG metrics are inconsistent."
Telsa, Inc. may receive a high ESG rating from one company and a low rating from another. Just because there are discrepancies in ESG ratings, doesn't mean they don't provide value. If I am going to buy shoes on Amazon, I look at the star ratings and read the comments. If someone gives 1-star because they received the shoes later than expected, and I personally don't care when I receive the shoes, I discard that comment from my decision calculation. It's still important information, but I give less weight to that factor than someone else might. Similarly, ESG rating companies are independent entities with their own, proprietary formula of factors and weights. While their research may generate a different result, it is still helpful and should be integrated into your decision-making process.
ESG data wasn't available in the past to the extent it is today. Explore the opportunities you have when it comes to ESG-investing. Join the growing number of investment professionals and researchers that are finding it makes good financial sense to put your money with companies willing to be transparent and take constructive actions (with time, capital or resources) to ensure they are well positioned for the long-term.