A Myth: ESG Investing Means Giving Up Returns

Published October 20th, 2022
Reading Time: 5 minutes
esg

Written by:

Sarah Hamilton CFP®, CSRIC™,MBA, MSFAIM
Zoe Network Advisor

A Myth: ESG Investing Means Giving Up Returns

Published October 20th, 2022 
Reading Time: 5 minutes
esg

Written by:

Sarah Hamilton CFP®, CSRIC™,MBA, MSFAIM
Zoe Network Advisor

Companies paying attention to ESG can better manage risk, positively impacting their bottom line. Moreover, 80% of CEOs view sustainability as a way of gaining a competitive advantage for their business.

Believe it or not, people used to believe investing in Environmental, Social, and Governance (ESG) companies meant giving up a return. Hard to believe, I know, when the reality is the contrary! 

Companies paying attention to ESG can better manage risk, positively impacting their bottom line. Moreover, 80% of CEOs view sustainability as a way of gaining a competitive advantage for their business.

Revealing the Truth – A Positive Shift 

Traditionally, the idea of social responsibility through investing meant removing specific products, potentially giving up returns, and taking a more values-based approach. Social responsibility has evolved. Now doing good doesn’t mean sacrificing shareholder value. It’s quite the opposite. The traditional way of investing is changing, and a new philosophy is emerging.

Aligning Your Investments and Your Values

The social component of ESG helps an investor express a preference for companies that positively impact their communities and maintain safe and inclusive work environments. A company’s board and C-suite can influence these decisions. “Governance” considers the conflict of interest in executive compensation and board structure. An accountable board has proven to be a more productive one.

Companies that pay attention to ESG issues can not only have a positive impact but can also boost shareholder value. Examples of that value are more effective risk management, reduced regulatory intervention, and resource efficiency. By incorporating ESG issues into a sustainability framework, corporations will ultimately improve performance over the long term.

The Game Changer: Shareholder Advocacy 

Most myths include characters and their approach to different situations. A big part of this myth is how investment managers evaluate a company’s ESG impact. Lucky for us, this approach has also evolved. Before, investors would remove companies from a portfolio that did not meet ESG standards. Now a more effective change agent has gained traction: shareholder advocacy.

The shareholder advocacy approach focuses on leveraging the power of stock ownership in publicly traded companies. Doing so helps encourage environmental, social, and governance awareness and action. Shareholder advocacy has been around for quite some time, but today the term is more aligned with ESG. Investors dedicated to this approach believe that improving a company’s sustainability will ultimately make the company a better long-term investment.

Practicing What We Preach

For example, Impax Asset Management includes board and executive diversity as part of its advocacy framework. Impax not only votes “no” on companies with all-male boards but will also propose policies to improve gender balance. Impax also pursues pay equity. Research shows that companies attract more talent when they work to close the gender wage gap.

Calvert, another fund management company, engages in ESG in various ways. One of their most notable stances is their take on gun control. Calvert does not invest in gun manufacturers; they believe guns are high risk to investors and communities. After the Parkland School shooting in 2018, Calvert reached out to retailers who sell firearms and urged them to eliminate the portion of their business involving assault rifles and automatic weapons. After Calvert’s recommendation, one retailer did announce it would change its policy on gun sales.

High-Impact Opportunities to Give Back 

It is essential to recognize the impact of raising ESG concerns, no matter how small the stake is in one company. Significant ownership in a public company is not required to have a voice and present a resolution that will encourage a board to act.

Lastly, not all ESG investment management strategies may use thorough and thoughtful principles. That is why entities like USSIF (The Form for Sustainable and Responsible Investing) and others are making regulatory comments to improve the quality of reporting around ESG factors. 

Specifically, USSIF has recommended consistent greenhouse gas emission reporting and is required to create a uniform ESG investment fund reporting methodology. As the popularity of ESG grows, investors should expect better transparency and more choice.

Social concerns emerge, and there is more visibility and access to resources that address social concerns. For example, it is no mystery that climate change impacts affect us now more than ever. According to USSIF, carbon emissions are the number one issue of interest driving ESG investing. 2022 has spotlighted the economic and humanitarian cost of climate behavior, thus garnering more interest in sustainable investing.

Where to Start

Awareness is the first step. It’s no coincidence that the title of this blog attracted you. After reading this article, you either broke the myth that ESG investing meant giving up returns or expand your knowledge on the topic. Are you ready to take the next step? Aligning your investments to your values is an exciting financial goal, and you now have the knowledge to meet them. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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