ESG Investing Is Popular But Deserves Scrutiny

By Thomas Kostigen

Money flowing into investments that support environmental, social, and corporate governance issues (ESG) is growing at a blistering rate. That is cause for both celebration and concern.

According to the Global Sustainable Investment Alliance, ESG assets under management (otherwise known as money that has been invested in the capital markets and is being professionally managed) amounts to $17.5 trillion, up 69 percent from just two years ago. And most of that money is coming from the pockets of investors in the United States and Canada.

“Assets managed with sustainable investing strategies now represent 26 percent of all investment assets under professional management in the United States,” the GSIA reports. That’s more than one out of every four investment dollars.

If you care about the planet, support local communities, or believe in fair labor practices, all that capital is reason to cheer. It means, assumably, companies that embrace ESG principles are being rewarded with capital and will, again assumably, do more of the right thing.

The United Nations Principles of Responsible Investing lists climate change, resource depletion, waste, pollution, and deforestation as issues that companies embracing positive environmental policies will likely address. Social policies at companies will likely highlight issues such as human rights, modern slavery, child labor, working conditions, and employee relations. Governance issues include bribery and corruption, executive pay, board diversity, political lobbying, and tax strategies. There are, of course, overlaps in areas. And many companies excel in one area, and may fall down in another.

“There are many ways to invest responsibly. Approaches are typically a combination of two overarching areas,” the UNPRI notes. One approach is to consider ESG issues when building a portfolio. Another approach is to encourage companies in which you are already invested to embrace or improve their ESG standing. This latter approach is known as active ownership, or “stewardship.” 

There are ESG mutual funds, ESG managed accounts, and even ESG exchange traded funds to make investing with a conscience super easy and super accessible. And that is the cause for concern. Many organizations haven’t quite figured out exactly what constitutes an ESG stock. Is it strictly one that has strong environmental, or “green,” policies? Is it one that has robust charitable programs? Or is it one that mandates board of directors diversity and stands up for things like gender equality?

Recently, for example, it was discovered that oil and gas stocks were being held in an ESG ETF being managed by a well-known financial organization. Proper screening, due diligence, and portfolio monitoring can get lost in the rush to gather investment dollars. That’s why it’s usually a good idea to have a financial advisor who can vet investments and ensure investment portfolios are being managed as advertised with the types of ESG-minded companies promised.

To be sure, an increase in the amount of money being invested in a broader menu of ESG investment product offerings is good news for ethically minded investors. But just like with Chinese food takeout, it’s wise to check what’s in the bag—and that you got what you ordered.

Thomas Kostigen is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.

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