Described by Forbes as being about “influencing positive changes in society by being a better investor”, Environmental, Social, and Governance (ESG) investing carries a multitude of credentials. It is also thought by many to greenwash a plethora of sins. Which is right?
ESG Investing: Why Do Companies Like It?
ESG is calculated by various factors such as emissions, product safety, and diversity, resulting in a score. Organisations with a high enough ESG score will find multiple investment doorways and incentives open to them, created by governments with the hope of utilising big business to create positive change. Investors looking to encourage the positive contributions of corporations will therefore often focus on their ESG ranking.
It Sounds Great, So What’s The Catch?
The main challenge that ESG investors have with the current set-up is in the way corporate responsibility is defined and calculated. For instance, if an organisation is thought to be ‘doing its bit’, it can receive an ESG score that seems at odds with reality. One of the most recent companies to jump on the ESG bandwagon is tobacco giant Philip Morris, whose somewhat vague commitment to a smoke-free future – despite the fact its aggressive pro-smoking strategies kill around 8 million people per year – has earned it a place on the Dow-Jones Sustainability Index. To say that this has raised eyebrows is an understatement, although few have been surprised: Exxon, Shell, and BP also score a suspiciously healthy ESG average.
If ESG Investment Is Flawed, Why Do Ethical Investors Continue To Choose It?
The rationalisation of the approach is that the more finance companies such as Shell receive in investment, the faster they can create positive change. This may be a very reasonable argument, but in practice it only works if legislation and standards support that shift. As various governments around the world have different thoughts on this matter, the risk of companies not performing as promised is high. Consequently, high profile ventures such as Norway’s $1.3 trillion wealth fund, are currently re-thinking their strategies.
What Mistakes Do ESG Investors Make?
The mistake that investors sometimes make is using the wrong kind of ESG screening. Negative screening will scan a peer-group of companies and identify how they perform comparatively, enabling investors to dodge the dubious ones. Positive screening does the opposite, looking only at the plus-points and therefore potentially allowing shares in unwanted corporations to slip into the mix.
How Can Companies Ensure That Their ESG Investment Choices Are Astute?
The best way around the limitations of ESG scoring is to always work with an experienced investment manager who can carefully select options based upon criteria that reflects your personal values. Ideally, a combination of positive and negative screening should be employed for the most comprehensive picture of performance. As this takes many of the high-rolling choices such as BP out of the mix, it therefore requires professional knowledge and insight to optimise the fund. The reality is, there are options that allow you to go as far as you want in terms of making a portfolio completely bespoke, but generally outside of a pooled investment strategy costs are slightly higher so you will need to decide how important it is for you to invest in line with any specific values.
What Next?
To ensure that your money creates the positive change you want it to, Arlo Group can help. For more information, please get in touch to discuss your investment goals.
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