Rethinking What ESG Investing Means
In May 2022, the electric vehicle manufacturer, Tesla, was removed from the S&P 500 ESG Index, which tracks the top-performing businesses meeting environmental, social, and governance (ESG) standards. According to a blog from the S&P Dow Jones Indices, the company’s removal was due to a low score that stemmed from—among other issues—claims of dangerous working conditions, reports of racial discrimination, and a lack of a low-carbon strategy.
Tesla’s CEO, Elon Musk, fired back against S&P in a tweet, asserting, “ESG is a scam.” He also pointed out that the index’s criteria ranked ExxonMobil among the top 10 best ESG companies, despite being a peddler of fossil fuels and one of the biggest polluters in the world.
While Tesla certainly has flaws, its exclusion from the list—and the inclusion of companies like Exxon and Amazon—has left many investors wondering what ESG investing really means.
What Does ESG Investing Mean?
ESG investing, also referred to as sustainable investing, is a relatively new—and increasingly fashionable—concept in which investors selectively identify the companies they want to fund based not only on their financial performance but also on the way they interact with their employees, their communities, and the environment.
But contrary to popular belief, ESG scores don’t tend to actually measure the impact a company has on the environment, society, or its workers. There doesn’t even exist a standardized reporting framework by which to objectively compare different organizations. Instead, these metrics assess the potential risk a company might face due to ESG-related issues. These criteria can be broken down into three categories: environmental, social, and governance.
Companies that are focused on addressing environmental issues can make for a better investment option because they tend to be better positioned for regulatory changes and a constantly-shifting business landscape. Considerations for this category include things like carbon emissions policies, energy usage, waste production and management, conservation efforts, and general compliance with environmental protection guidelines.
The social aspect of ESG looks at a company’s relationship with its workers, shareholders, and the larger community. A company that gives back to the local community and has its customers’ and employees’ best interests in mind is more likely to see more sustainable profits and lower turnover rates. While these can be great indicators of a healthy, socially responsible company, it’s important to make sure that any commitments are backed by measurable action.
Proper governance ensures that a business is running itself well with accuracy and transparency for all shareholders. Some ESG investors also want to see increased diversity in executive leadership. With differing views and backgrounds in the C-suite, companies can bolster decision-making to include a wide variety of perspectives.
ESG Market Trends
As people become more socially and environmentally conscious, a growing number of investors want to align their holdings with their values. Because of this, ESG indices are fast becoming one of the most popular investment vehicles, reaching a record market size of $21.5 billion in Q1 of 2021, Morningstar reports.
However, despite their prevalence in the investment industry, ESG indices still lack a universal set of standards. This is, in part, why Exxon remains in the top 10 best companies in the S&P 500 ESG Index despite being counterintuitive. The other aspect to keep in mind is that assessing environmental and social impacts, like a decrease in greenhouse gas emissions or a company’s work culture, is often more complicated than measuring the financial performance of these funds.
As a result, the ESG market has exploded with funds that include large corporations in less ethically-minded industries, such as oil and tobacco. These companies aim to capitalize on the growing demand for environmentally and socially conscious products and services by presenting as eco-friendly without following through on commitments. This so-called “greenwashing” behavior can present a problem for ESG investors.
Seeing Past the Greenwashing
Greenwashing is when a company attempts to portray itself as environmentally conscious by making unsubstantiated claims about its products or services. This often comes in the form of “all natural” labels or claims about reducing pollution and energy usage while, in reality, the company isn’t taking meaningful steps toward any green initiatives or making the world a better place. So, how can ESG investors identify truly sustainable and socially responsible companies? Here are three ways you can ensure that your money is in service of the right causes:
Exclude Certain Industries
In lieu of established regulations and sustainability standards, some funds take it upon themselves to exclude specific industries like oil and gas, tobacco, and weapons. By investing in these ESG funds, you can rest assured that your money isn’t going toward businesses that do the most harm to people and the environment.
Look into Individual Companies
When comparing fund families or investment firms, do your research on the individual companies they hold, paying close attention to annual reports. If you see holdings that are questionable from an ESG perspective, this could be an instance of greenwashing.
Work With Integrity Financial Planning
We will work with you to develop a plan that fits your unique ESG views. With access to institutional research and the ability to fine tune a personal portfolio of individual stocks, we provide support and expert portfolio management at each step to ensure that you identify an ESG approach that aligns with your values and expectations. If you’re considering investing in an ESG fund, contact us today.