Can sustainable investing work?
The big idea
Socially responsible investing is the way of the future. But how can it be most effective and not just hype?
Explain it like I’m 5!
What is ESG exactly?
ESG stands for environmental, social, and corporate governance—criteria that investment firms are increasingly using to screen the stocks and bonds issued by companies. It refers more broadly to ethical investing, and the ecosystem of index funds, assessment, and activism that has sprung up around it.
By the digits
~$40 trillion: Money held in ESG assets worldwide
$53 trillion: Total of ESG assets worldwide by 2025, according to Bloomberg Intelligence
1/3: Proportion of global investments that could be ESG by 2025
90%: Millennials active in the markets who say they believe in sustainable investing, according to a 2019 study by Morgan Stanley
$285 billion: How much ESG funds grew in 2020 alone, a 96% increase over 2019
Brief history of ethical investing
1800s: Quakers and Methodists urged business leaders to shun enterprises that supported slavery, as well as companies that profited from vices such as drinking spirits or smoking tobacco
1960s: College students protesting the Vietnam War implored university endowments to stop investing in arms manufacturers
1980s: Environmental disasters such as Three Mile Island and Chernobyl made environmental concerns a top priority for crusading investors
Late 1980s: Organizations from states to corporate boards combed through their pension fund portfolios to weed out companies that did business in apartheid South Africa
2005: the Principles of Responsible Investment, a network of 50 institutional investors, is created (it now has 3,000 members)
Person of interest: Catherine Howarth
London-based charity ShareAction has spent years undertaking one of the toughest chores in the ESG movement: pushing banks and investment firms to use their clout to address climate change. As the group’s CEO, Catherine Howarth has pushed the organization to take on big banks—in May, the organization got HSBC to stop financing coal industry clients. To do that, and to ensure banks live up to their promises, ShareAction has to apply pressure and keep doing it.
DIY: How to start investing in ESG
🏆 Set your goals. The ESG universe is vast, so decide what’s most important. Is it climate change? Workplace diversity? Child labor? Or do you prefer a broad-based approach that incorporates all those issues?
👀 Check your 401k or pension plan to see which, if any, ESG funds might be available. This is a convenient place to start.
✅ Start with curated lists. Don’t play a guessing game with ESG funds—there are too many! Most money management firms curate shortlists of top performers that have been scrutinized by their own analysts. Comb through them to make your first picks.
🕵️ Do your research. Particularly if you prefer hand-picking individual stocks via Robinhood or other trading apps. ESG ratings firms such Sustainalytics and MSCI make their company scores public on their websites.
📜 Scroll through a fund’s holdings. Even though it’s got an ESG label, you might not like some of the stocks in there, so be sure before you invest.
Will ESG truly change the practices of companies?
It hasn’t yet, at least not directly, according to a study published in May by the European Corporate Governance Institute. The authors found that increasing the amount of ESG investment in companies did not lead the recipients of those funds to reduce pollution, improve workplace safety, or increase the gender and racial diversity of their boards. Skeptics contend that ESG, for all its good intentions, is primarily marketing hype designed to make investors believe their funds aren’t contributing to a host of ills.
Yet activists on the front lines of ESG counter that there are signs of a major leap forward—from changing the board of a company like ExxonMobil to BlackRock CEO Larry Fink declaring that climate change augured a “fundamental reshaping of finance”. The mindset of an entire generation of investors is changing, and companies will have to respond or watch their stock valuations fall.
Nearly 200 CEOs just agreed on an updated definition of “the purpose of a corporation”. The 2019 statement shows just how seriously corporations are now taking their ethical responsibility.
Sustainable finance is performing well in the pandemic—but why? One reason: ESG companies are generally better managed.
Can private equity firms have a purpose other than making money? Why are a growing number of financial services companies registering as B Corps, which means they are held accountable by employees, communities, and the planet?
Sustainable investing risks becoming a victim of its own success. Without its own standards, the world of sustainable and socially responsible finance needs a gatekeeper.