It has been all the rage for several years now. Still, in recent times, it has come under assault from many different quarters due to the generational shift in demographics that highlights new marketing trends. What exactly does it mean to invest with an “ESG” lens?
The issue is that nobody is aware of it. Or perhaps everyone is already aware. They are unanimous in their conviction that it must be something else (which, by the way, is a pretty strong conviction).
According to Albert Feuer, Principal at the Law Offices of Albert Feuer in Forest Hills, New York, who specializes in environmental, social, and corporate governance (ESG) investing, one of the issues with ESG investing, like many other investing strategies, is that there is no agreement on what it is in theory or practice. There is no consensus over the phrases used to refer to ESG investment. Some people talk about ecological, social, and political aspects, and others refer to elements such as the environment, stakeholders, and governance. Ethical, social, and environmental (SSE) investing is nothing more than using such factors to help determine whether to acquire, dispose of or exercise ownership rights in an interest in an enterprise. This is true regardless of which definition is used and which individual factors are selected or emphasized. There is also no consensus on how investors should consider such considerations.
It is possible that the main purpose of focusing on such characteristics, as well as on any other collection of investment elements, is to increase financial returns, such as by properly valuing the influence of these factors on business success.
On the other hand, just as with many other investment techniques, the reality is in the eyes of the person doing the investing. In the same way that some investors favor “Growth” investing over “Value” investing, and others favor “Value” investing over “Growth” investing, some investors may see a place for ESG (however they define it), while other investors do not.
ESG is not an entire plan but may be used as a component when building an investment strategy, says David Blaylock, Head of Financial Planning for Origin in Dallas-Fort Worth. ESG can be utilized as a factor when developing an investment strategy. For instance, the purpose of an individual’s investing strategy may be to lower risk, and taking into account the dangers that companies face on the environmental, social, and governance (ESG) front might make it easier to accomplish that objective. Someone would expect to see the impact in the areas indicated for anything to be characterized as an investment plan. The way things are right now, we do not see how this form of investment (i.e., ESG) corresponds to anything that goes beyond a preference.
According to Feuer, another example would be improving how various businesses evaluate the consequences of climate change on their operations. In this scenario, environmental, social, and governance (ESG) investing, just like any other investment strategy, may be evaluated by looking at financial returns, either risk-adjusted or absolute, across the selected time frames. It’s possible that focusing on such characteristics is also meant to, at least in part, stimulate improved performance from businesses. This could (but doesn’t necessarily have to) come at the price of financial gains. When faced with a scenario like this, it is reasonable to inquire whether the ESG performance measurements in question are reliable indicators of the importance placed on such measures. For instance, if the goal is to increase worker pay, one question to ask is whether the action will just apply to employee remuneration or whether it will also apply to all employees linked with the firm, such as the enterprise’s independent contractors or business associates.