A priority in a changing world
ESG investing has recently become a buzzword on Wall Street. Some investors believe that a company should not only generate profits but also reward its employees, partners and the community.
Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.
Thoughtful investors in ESG
Investors can now include an extra level of non-financial analysis prior to making investment decisions.
Morgan Stanley found that nearly 95% of millennials are interested in sustainable investing and 75% of those believe that sustainable investment decisions can impact climate change policy, according to its report.
As of the end of the second quarter 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion of assets. In the U.S., assets in sustainable index funds have quadrupled in the last three years and now represent 20% of the total, according to Morningstar reported by CNBC news.
The implementation of long-term ESG projects by a company could be a manifestation of its company strength, including leadership, finance, execution, and moral levels. If a company can achieve long-term social initiatives while maintaining strong operating performances, it tends to be more competitive among its peers.
However, no one-size-fits-all standards
There are no agreed-upon standards for evaluating ESG reports. Each institution formulates the evaluation system based on its own considerations that most companies won't pass every test.
The inconsistency of standards from different investors will only increase the amount of due diligence needed, adding more research time. For example, a tobacco company may be rated as an ESG company, because it gained a high ESG score for job creation contribution to the community, which may misalign with your values such as prioritizing your investments in a health-friendly, lowcarbon emission company.
Lack of long-term financial performance data
ESG investing has boomed in recent years. Although some researches showed that ESG investing brought above-average returns, it can't speak for the future long-term performance.
ESG investing standards will require to go through an amount of trial and error to reach a point where its track records can be proven.
Where to find ESG stocks and funds
Generally speaking, when a company initiates its ESG plan, it outlines measurable goals and progress, which can be announced in their regular reports. If you’re a fund investor, you can obtain information from the fund issuer's website. Usually, the funds will contain the keyword "ESG" so that you can easily filter them out.
