I have written several articles on postings related to Big Tech, Social Media and Corporations. A list of links have been provided at bottom of this article for your convenience. This article will, however address different aspects on these Industries.
Environmental, Social And Governance: What Is ESG Investing?
Environmental, social and governance (ESG) investing is a strategy you can use to put your money to work with companies that strive to make the world a better place. ESG investing relies on independent ratings that help you assess a company’s behavior and policies when it comes to environmental performance, social impact and governance issues.
How Does ESG Investing Work?
The ESG strategy means investing in companies that score highly on environmental and societal responsibility scales as determined by third-party, independent companies and research groups.
“At its core, ESG investing is about influencing positive changes in society by being a better investor,” says Hank Smith, Head of Investment Strategy at The Haverford Trust Company.
According to Smith, ESG investing assumes that there are certain environmental, social and corporate governance factors that impact a company’s overall performance. By considering ESG factors, investors get a more holistic view of the companies they back, which can help mitigate risk and identify opportunities.
Here’s a closer look at the three criteria used to evaluate companies for ESG investing:
- Environment. What kind of impact does a company have on the environment? This can include a company’s carbon footprint, toxic chemicals involved in its manufacturing processes and sustainability efforts that make up its supply chain.
- Social. How does the company improve its social impact, both within the company and in the broader community? Social factors include everything from LGBTQ+ equality, racial diversity in both the executive suite and staff overall, and inclusion programs and hiring practices. It even looks at how a company advocates for social good in the wider world, beyond its limited sphere of business.
- Governance. How does the company’s board and management drive positive change? Governance includes everything from issues surrounding executive pay to diversity in leadership as well as how well that leadership responds to and interacts with shareholders.
For many people, ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, customers, shareholders and the environment.
“Identifying the impact, positive or negative, on these five stakeholders is what should become the measuring stick for quality ESG investing,” says Mike Walters, CEO of USA Financial. “This is important for the obvious impactful reasons relating to each stakeholder, but it also can be used to identify the strength and sustainability of the company itself.”
Walters says that companies that put in the work to balance the benefits for each of their five stakeholders simply become well-run companies. And well-run companies become good stocks to own.
How Are ESG Scores Calculated?
ESG research firms produce scores for a wide range of companies, providing a clear and handy metric for comparing different investments.
“ESG scores represent ratings that research firms assign to individual companies,” says Linda Zhang, Senior Advisor at SoFi and CEO of Purview Investments. “The rating firms tend to rely on multiple criteria to evaluate each of the individual E, S and G components.”
Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv are a few of the most well-regarded ESG research companies. Scores generally follow a 100-point scale: The higher the score, the better a company performs in fulfilling different ESG criteria. Scores may vary among firms, which may employ different metrics and weighting schemes.
While the specific factors assessed vary by company, ESG rating firms commonly review things like annual reports, corporate sustainability measures, resource/employee/financial management, board structure and compensation and even controversial weapons screenings.
Why Should You Choose ESG Investing?
Ensuring that your investment choices are aligned with your priorities is one reason to pursue ESG investing
“Many clients are very concerned about environmental and social problems, such as climate change leading to more and severe climate crises, gender and racial inequality, data security and privacy,” says Zhang of SoFi and Purview Investments. “They want to make sure that they don’t invest in firms that exacerbate or contribute to these problems and would rather invest in those that are champions in leading ESG movements.”
But aside from helping to fight climate change and social injustice, an ESG investing strategy can offer higher returns as well.
Take JUST Capital’s JUST U.S. Large Cap Diversified Index (JULCD), an index that tracks the performance of large, public companies with high ESG scores. It includes 50% of the large-cap public companies in the Russell 1000 index but excludes companies that lack a demonstrated commitment to things like the well-being of their employees, beneficial products, positive environment performance and strong communities.
JUST Capital’s JULCD index outperformed the Russell 1000 for three years in a row by at least a slim margin:
|JUCLD Index||Russell 1000 Index|
If you invested in an exchange-traded fund (ETF) that contained stocks of the same companies in the JULCD index, like the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST), you’d be putting your money to work in companies with strong ESG scores as well as earning a decent return on your investment.
“There’s a misconception out there that you need to be willing to give up returns in order to invest responsibly but a growing body of research shows that ESG actually helps mitigate risk,” says Smith of The Haverford Trust Company.
It should be noted, though, that while many ESG indexes and index funds have recently outperformed broad indexes, like the Russell 1000 or S&P 500, they’ve done this in part because of the greater percentage of tech companies they contain. It’s important to have a mix of sectors represented in your investments to decrease the risk that poor performance in one tanks your investment dollars, so you may wish to speak with a financial advisor about how you can balance out any risks these funds introduce by overly concentrating in particular sectors.
How Can You Find ESG Investments?
If you’re ready to put your money to work in an ESG strategy, there are multiple ways to identify investments that fit the bill, including do-it-yourself research, robo-advisors and financial advisors.
Do Your Own ESG Research
For investors looking for individual stocks, various outlets publish “best of” lists of the top ESG-rated stocks each year. You can start with these lists to identify potential investments that might align with your goals and then build a diversified portfolio with an asset allocation strategy that fits your investment horizon.
You don’t have to hunt for just individual ESG stocks, though. You can also opt for funds, just as you can with non-ESG investing. This saves you the hassle of picking individual companies by letting a fund manager or index make the choices for you. Research for ESG ETFs and mutual funds may also be a bit easier online.
“For more granular info, As You Sow is a great resource that breaks out exposure to companies involved in things like fossil fuels and deforestation in both ESG and non-ESG funds,” says Walters of USA Financial.
Walters says investors should take note of expense ratios for ESG funds. “ESG characteristics are important, but so are more traditional metrics like cost,” he says. “Expense ratios for ESG funds have decreased over the years, but they are still higher than other funds on average.”
This means you may be paying a slight premium to invest in funds that are targeting ESG criteria. You may be OK with paying a small surcharge to invest your values, but it’s important to keep in mind nevertheless. Higher expense ratios that aren’t associated with at least slightly higher performance may reduce your long-term returns.
For investors who want to blend a DIY approach with some guidance, robo-advisors that offer ESG-conscious portfolios could be a smart place to start.
While guidelines as to what qualifies an investment as ESG may vary between robo-advisors, those known to operate with an eye toward ESG include Betterment, Ellevest, Wealthsimple, Sustainfolio, Earthfolio and OpenInvest.
Fees with a robo-advisor may be higher than a do-it-yourself approach and you may end up in many ETFs you could have invested on your own, but you’ll benefit from expert-level investment research and automated investment management.
ESG Financial Advisors
There are plenty of good reasons to work with a financial advisor, and help with ESG investing strategies is one of them. Another is that financial advisors aim to get a high-level view of your entire financial life, including details that robo-advisors can miss, like personal values that could be used to tailor an ESG strategy to your worldview.
If you already have an advisor, they should be able to guide you toward investment choices with high ESG ratings that are aligned with your investment goals. If you’re searching for a financial advisor, ask candidates what kind ESG options they’ve recommended to their clients in the past.
While the costs are higher than self-directed research or robo-advisors, you’re gaining a full-service relationship and a trusted ally to make investments with a positive impact on the world.
Other Strategies for Socially Conscious Investing
While ESG offers one strategy for aligning your investments with your values, it’s not the only approach.
Socially Responsible Investing (SRI)
Socially responsible investing (SRI) is a strategy that also helps investors align their choices with their personal values. SRI presents a framework for investing in companies that agree with your social and environmental values.
Whereas ESG investing takes into account how a company’s practices and policies impact profitability and future returns, SRI is more tightly focused on whether an investment is more precisely in line with an individual investor’s values. ESG factors in corporate performance while SRI solely focuses on the investor’s values.
For example, if health and well-being are key values for you, one possible SRI strategy would be to completely avoid investments in companies that make alcoholic beverages or tobacco products. An ESG strategy might be fine with investing in tobacco or alcohol manufacturers so long as the companies social and management policies met high standards, and their environmental record was strong.
Impact investing is less focused on returns and more focused on intent. With impact investing, investors make investments in market segments dedicated to solving pressing problems around the globe. These sectors could include those making advancements in green and renewable energy, housing equity, healthcare access and affordability and more.
The Global Impact Investing Network (GINN) has four published guidelines for impact investments:
- Intentionality. Investments are made with the intention to affect positive social or environmental change.
- Investment with return expectations. Of course, investments should generate a return of capital at a minimum.
- Range of return expectations and asset classes. Different investment areas should have aligned expectations about returns. Sometimes these returns are below market rate.
- Impact measurement. Investments should have an exceptional level of transparency so investors can assess how their dollars help to achieve meaningful change.
Compared to ESG, impact investing may generate lower returns depending on the sector invested in due to concessions investors make to support earlier-stage ventures in less developed markets. However, for investors with a sincere interest in effecting social equity, impact investing offers a more direct approach to affecting change with highly focused investments.
Created by Raj Sisodia, a marketing professor, and John Mackey, the co-founder of Whole Foods, conscious capitalism is the belief that companies should act with the utmost ethics while they pursue profits.
The four guiding principles of the movement, as defined by Conscious Capitalism, are:
- Higher purpose. Profit for these companies is a reward for a well-built conscious company, not the end-all, be-all. They strive toward a higher purpose and larger impact on the world beyond money and market share.
- Stakeholder orientation. A company and its leaders should develop an ecosystem that balances the needs of all stakeholders equally, not overweighting shareholder returns at the expense of other stakeholders.
- Conscious leadership. Leaders should work towards developing an inclusive culture and weigh equally the interests of all stakeholders in the business—from employees to shareholders to customers.
- Conscious culture. Companies should intentionally create a culture within their businesses that promote their values and purpose.
Conscious capitalism is strikingly similar to ESG—with one notable difference. The principles of conscious capitalism are typically embodied by the leader of a company, which often leads to them running a company with a high ESG score. Thus, when investors practice an ESG-guided investment strategy, they’re likely choosing companies that embody conscious capitalism principles.
Is ESG investing just a scam?
The sustainability trend is growing as the world is more and more aware of different situations in the environmental, social, and governance areas. Wall Street is now promoting a new set of standards for public companies to investors that are called ESG investing, where ESG stands for (Environmental, Social, Governance). Environmental criteria consider how a company affects the nature and environment. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance assesses the company’s leadership, executive pay, audits, internal controls, and shareholder rights. This act aims to raise investors’ and company’s awareness toward sustainability.
The act by Wall Street is being praised by the community as they are pleased that Wall Street is finally acknowledging the problems that are happening in the real world such as air and water pollution, overuse of oil and coal, companies not treating employees properly, executives bonuses being of control and etc. However, I think this has nothing to do with Wall Street caring about ESG, but them wanting to make money out of it. If companies actually care about ESG they would have already set up a standard for each of these criteria internally regardless of the promotion by Wall Street. Besides, even if an “ESG company” turns out to be harmful to the community, the company does not have to carry any responsibility as ESG are just standards, not regulations. Also, guess who assesses the ESG score for companies and writes out reports? Wall Street’s firms and banks.
You can already tell ESG investing is a joke when even oil companies and tobacco companies are claimed to be ESG companies. Altria is one of the examples, it is so ironic and disgusting that one of the biggest tobacco companies that also sell wine, weed, and Juul claims themselves to be an ESG company when all they sell is nothing but harm to the society and environment, how does it even meet the environmental standards. One of the aspects of “Social” is to examine how companies manage relationships with their suppliers. Another proclaimed ESG company, Apple, is known for squeezing profits from its suppliers and treating them badly because they are dominant in the industry, and suppliers rely heavily on them. This is not a big deal from a business perspective as it is normal that companies want to make more money but calling this a socially conscious company is just misleading.
Also, famous financial firm MSCI introduced an index called the ESG index that tracks listed ESG companies, which then allows different investment firms like Blackrock and Morgan Stanley to make an ETF that tracks the index. The ETF is then being listed on the stock exchange for investors to invest in and the firm charges an annual commission according to the amount investor invested in the ETF. This itself helps investment firms and MSCI earn a lot more revenues with no risk at all while the ones that are at risk are the individual investors who are left alone in the dust. According to a recent report, investors now held $11.6 trillion in assets chosen according to ESG criteria at the beginning of 2018, and are still growing at a rapid rate.
I definitely support the philosophy behind ESG as I agree the world needs to be more conscious of environmental, social, and governance areas and companies should be responsible to the society. However, “ESG investing” is a whole other story. It is just a sugar-coated scheme by Wall Street’s investment banks and firms using ESG as a pretty disguise to capitalize on investors and also attempt to wipe off its bad reputation at the same time. If Wall Street and companies really do care about ESG, this surely would not be the way of how it is done.
Musk is right, ESG stock ratings are a scam
How can a so-called ‘sustainability index’ keep polluting Exxon but drop electric carmaker Tesla from its portfolio?
A major stock index that tracks sustainable investments dropped electric vehicle-maker Tesla from its list in May 2022 – but it kept oil giant ExxonMobil. That move by the S&P 500 ESG Index has set off a roiling debate over the value of ESG ratings.
ESG stands for environmental, social and governance, and ESG ratings are meant to gauge companies’ performance in those areas. About one-third of all investments under management use ESG criteria, yet many environmental problems continue to worsen.
Tom Lyon, a business economics professor at the University of Michigan who studies sustainable investing, explains what happened and how ESG ratings could be improved to better reflect investors’ expectations.
How does a company like Tesla, which makes electric vehicles, get dropped from the S&P 500 ESG index while Exxon is still there?
ESG ratings agencies typically rate companies against others within their industry, so oil and gas companies are rated separately from automotive companies or technology companies.
Exxon stacks up fairly well relative to others in the oil and gas category on many measures. But if you compared Exxon to, say, Apple, Exxon would look terrible on its total greenhouse gas emissions.
Tesla may rate well on many environmental factors, but social and governance factors have been dragging the company down. S&P listed allegations of racial discrimination, poor working conditions at a Tesla factory and the company’s response to a federal safety investigation as reasons for dropping the company.
The way ESG criteria are measured also carries some biases. For example, the ratings consider a company’s direct greenhouse gas emissions but not its Scope 3 emissions – emissions from the use of its products. So Tesla doesn’t get as much credit as it might, and Exxon doesn’t get penalized as much as it might.
How can ESG investments better reflect investors’ expectations?
One strategy is for investment firms to invest in a small number of carefully vetted companies and then use their influence within those companies to monitor behavior and drive change.
Another is for raters to stop trying to aggregate all of the different measures into a single rating.
Investors concerned about ESG often value different objectives – one investor may really care about human rights in South America while another is focused on climate change. When ESG ratings try to force all of those objectives into a single number, they obscure the fact that there are trade-offs.
ESG could be broken up so ratings instead focused on each piece individually.
Environmental issues tend to have a lot of available data, which make E the easiest category to rate in a consistent way. For example, scientific data is available on the increased health risks a person faces when exposed to benzene.
The EPA’s Toxic Release Inventory shows how much benzene various manufacturing facilities release. It’s then possible to create a toxicity-weighted exposure measure for benzene and other toxic chemicals. A similar measure can be created for air pollution.
Social issues and governance issues are much harder to aggregate up into single ratings. Within the G category, for example, how do you aggregate diversity in the board room with whether the CEO personally appointed all the board members? They are capturing fundamentally different things.
The SEC is considering a third strategy: enhancing disclosure requirements so investors have access to better information about what is in their ESG portfolios. The SEC proposed new reporting rules for ESG funds and advisors on May 25, 2022, including proposing that some environment-focused funds be required to disclose the greenhouse gas emissions associated with the portfolio.
What else do ESG ratings overlook?
ESG ratings often omit important behaviors and choices. One that’s particularly important is corporate political activity.
A lot of companies like to talk a green game, but investors rarely know what these companies are doing behind the scenes politically. Anecdotally, there is evidence that many are actually playing a fairly dirty game politically. For example, a company might say it supports a carbon tax while donating to members of Congress and lobbying groups that oppose climate policies.
To me, that’s the most egregious failure in the ESG domain. But we don’t have the data to track this behavior adequately, since Congress has not required disclosure of all types of political spending, especially so-called “dark money” from super PACs.
A few organizations are gathering more detailed information on specific issues. InfluenceMap, for example, invests an enormous amount of time looking at companies’ annual reports, tax filings, press releases, advertisements and any information about lobbying and campaign spending to rate them.
It gave ExxonMobil a grade of D- for its political action on climate.
What can investors do if ESG ratings are flawed?
Investors can always take a more targeted approach and invest in specific categories that they believe will provide essential solutions for the future. For example, if climate change is their leading concern, that may mean investing in wind and solar power or electric vehicles.
ESG funds often claim that they outperform the market because companies with strong management in environment, social and governance areas tend to be better managed overall.
And on average, firms with higher social performance do have a somewhat higher financial performance. However, some insiders, like former Blackrock sustainable investment head Tariq Fancy, argue that ESG portfolios today aren’t very different from non-ESG portfolios, and often hold almost all the same stocks.
There’s also a larger question in the background of all of this: Is investment pressure really what’s going to drive us toward a more sustainable future?
If you want to make a difference, consider spending time working with activist groups or groups that support democracy, because without, public pressure and democracy, countries aren’t likely to make good environmental decisions.
I am the first one to acknowledge that I know little about stocks, the economy and margins and all that stuff. But I am willing to learn, I also have a brain of sorts and one thing that my parents gave me besides all the nasty genes they gave me was some common sense. So what I can gather is that companies are being rated not on their ability to turn a profit but how environmentally responsive they are. How that is going to help my bottom line and retirement fund I have no idea. I guess at least I will have a nice tree growing over my paupers grave when I die. While I believe it is important on how a company cares for and treats the environment do we really need it to be the deciding factor in our investments? Also how is the grading done? Can anyone remember the Exxon Valdez oil spill? It was probably the most environmentally damaging event to occur in the 20th century. Yet the company has just about a perfect rating according to the ESG Index and Tesla doesn’t even make it to the list of companies being evaluated. Can we say scam and bullshit?
forbes.com, “Environmental, Social And Governance: What Is ESG Investing?” By E. Napoletano, Benjamin Curry; medium.datadriveninvestor.com, ” Is ESG investing just a scam?” By Felix Lung; asiatimes.com, “Musk is right, ESG stock ratings are a scam: How can a so-called ‘sustainability index’ keep polluting Exxon but drop electric carmaker Tesla from its portfolio?” By Tom Lyon;
Postings for Big Tech, Social Media and Corporations