Investors like their money to make money. But increasingly, according to a new report from the Harvard Business Review, they expect it to do good, too. In 2010, environmental, social, and governance (ESG) investments made up approximately $3 trillion of all professionally managed assets. As of the beginning of last year, that number had quadrupled to $12 trillion (pdf)—$1 in every four invested in the US.
Investors are speaking with their wallets, the report explains, and have an active interest in the social and environmental decisions their money funds on both a governmental and corporate level. “They can be quick to punish companies for child labor practices, human rights abuses, negative environmental impact, poor governance, and a lack of gender equality.” In response to growing investor awareness about climate change, rating companies such as Moody’s increasingly consider climate risk as a negative factor when assessing credit ratings.
That’s the good news. The less good news is that the criteria for ESG investment can be vague—or so easy to meet as to be almost meaningless. It includes exclusionary screening, for instance, where funds divest from harmful industries such as weapon markers or the so-called “sin industries” (pdf)—gambling, pornography, tobacco and alcohol. Harm may be mitigated by excluding investment in these industries, but there isn’t necessarily the same commitment to actually doing good. A fund’s holdings may count as ESG investments, but still contain shares of oil companies, for example, because they weren’t specifically excluded.
Last year, Pictet Asset Management forecast that ESG assets would comprise around two-thirds of assets managed by global funds by 2020. Take out exclusionary spending, and that number falls by more than half, down to 31%.
In short, what constitutes socially responsible investing is often in the eye of the beholder. Acceptable criteria is subjective and broad, spanning the gamut of investors’ personal values. But stringency may be an effective insurance policy in the long run: environmental or governance disasters often come with high associated losses—not least in terms of public relations. (Volkswagen’s emissions scandal is one particularly notorious example.) Having high-quality standards in place across such areas as environmental risk management, the company’s working conditions, and high-integrity governance may be an effective way to reduce the risk of such a snafu. It may help investors to sleep better at night, too.