As for funds that carry ESG labels, we found that they have tended to outperform over the medium to longer term. According to Morningstar, over the 10-year period through 2019, more than 58.8% of sustainable funds outperformed (delivered higher returns than) their average traditional peers.
The research showed that overall, sustainable funds have consistently shown a lower downside risk than traditional funds. And while some ESG funds are relatively new (particularly many passive ones), they've been able to show solid performance and resiliency in both good markets and bad.
Potential disadvantages of ESG investing include higher expense ratios, issues with greenwashing or using dishonest marketing tactics to convince investors a company or fund is making a positive impact, limited exposure to certain sectors, and a lack of standardized ESG scores for evaluation purposes.
Scandals within the ESG sector have further eroded investor confidence. Cases of greenwashing, where companies misrepresent their environmental efforts, have undermined trust in ESG funds.
The relationship between profitability & sustainability
However, while this may seem beneficial in the short-term, research from accountancy firm Moore Global, suggests that businesses who have shown an 'express commitment to ESG' compliance saw a 9.1% increase in profits over the last three years.
The ESG investment backlash is beginning to have an impact | FT Moral Money
What is the argument against ESG?
Socially, the backlash against ESG reflects wider debates on corporate responsibility and the role of businesses in addressing societal issues. Critics argue that the focus on social and environmental goals distracts from a corporation's primary objective: generating profit for its shareholders.
It is possible that the overly generic ESG brand will never recover its appeal, with the different parts of it eventually rebranded to suit their specific client bases. BlackRock, the world's largest asset manager, has already dropped it and is now emphasizing transition themes over ethical stewardship of companies.
Unfortunately, ESG data suffers from a multitude of flaws, and in our view, does not focus on the areas that matter. One of the main challenges is that ESG scoring methodologies tend to focus on how well companies manage their internal processes, rather than the real-world impacts of their products and services.
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.
Sponsors might be closing ESG funds following poor performance, to pursue economies of scale through consolidation, or simply as a result of fund complex reorganizations. For example, iShares MSCI Germany Small-Cap ETF closed after poor performance in 2022-2023.
Regulatory non-compliance and increased legal risks: Proactively addressing ESG concerns can help companies stay ahead of evolving regulatory requirements. Ignoring or mismanaging ESG leads to non-compliance and potential legal issues, which can be costly and damaging to a company's reputation.
ESG investing is a component of ethical investing that focuses on Environmental, Social, and Governance factors. While ethical investing encompasses a broader range of strategies and principles, ESG investing specifically evaluates a company's sustainability and ethical performance based on these three criteria.
This includes the way in which environmental, social and governance (ESG) issues could affect the value of the investments. For example, if a company has a negative effect on society or the environment, or is poorly run, its share price can fall, leading to lower returns for its investors.
One of the main disadvantages of ESG criteria is that companies are not required to disclose all information related to their sustainability practices. This can make it difficult for investors to evaluate the sustainability and ethical impact of investments.
If you had to pick just one ESG exchange-traded fund, the Vanguard ESG U.S. Stock ETF would probably be it. With nearly 1,500 holdings, almost all from the U.S., this ETF hods an extremely well diversified portfolio that meet its environmental, social and governance principles.
Across multiple tests, we've found that investors can build global portfolios tilted toward high-scoring ESG companies without compromising returns. However, investors building portfolios in the U.S. and Canada face a small return discount for investing in these ESG companies.
Important information: investing for longer increases the likelihood of positive returns. Over a period of five years or more, investments usually give you a higher return compared to cash savings. But investments can go down as well as up in value, so you could get back less than you put in.
Critics of ESG — such as a group of Republican states that banned Blackrock and other “ESG friendly” asset managers from their state pension plans — argue that considering environmental and social factors violates the fiduciary duty that asset managers have towards their clients.
ESG stands for environmental, social, and governance, and is a set of criteria used to assess a company's sustainability and societal impact. ESG helps investors to identify companies that are more sustainable and better positioned for long-term success.
ESG Fund Returns Recover, but Still Trail Conventional Peers by a Small Margin. The tech stocks that helped ESG funds and the utilities that hurt them in 2023. Sustainable funds performed much better in 2023 compared with 2022, but results were mixed across asset classes.
Many issues come under the ESG umbrella, including complaints concerning the organisation's environmental impact, allegations of misreporting or conveying a false impression of environmental and sustainability credentials (greenwashing), tax evasion and corruption, human rights abuses in the supply chain and bullying, ...
The performance of ESG funds and ETFs has matched or surpassed traditional funds/ETFs over most time periods, and regulators continue to focus on climate change risks, and on improving standards and disclosures to assess and mitigate these risks.
While ESG-related principles continue to remain an important aspect of operations for many stakeholders, there have been signs of a shift in the ESG landscape when it comes to the investing in, and management of, private market funds, with many institutional investors replacing the ESG acronym with terms such as “ ...
Smaller companies often lack the resources needed to produce lengthy sustainability reports, and so are at risk of being penalised for their lack of data. Some ESG data can be useful in certain circumstances, but an over reliance on simplistic ESG scores can be a dangerous strategy.
About two-thirds of privately-owned companies have ESG initiatives in place, according to the NAVEX survey. 89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.
