Sustainable Investing ESG (2024)

FAQs

Does ESG investing really work? ›

ESG funds have similarities to other funds

While the results from these time periods have been generally encouraging for ESG funds as a whole, we don't see convincing evidence that ESG funds are reliably better than non-ESG funds.

The backlash against ESG investing and climate-focused regulations has increasingly spread to Europe, once a leader in ESG regulations. Widespread protests by farmers throughout the EU have been spurred, in part, by sustainability-related protocols that have increased operating costs and reduced profit margins.

9 in 10 asset managers believe that integrating ESG analysis into their investment strategy will improve long-term returns, and a majority of institutional investors have reported that their ESG products have outperformed traditional counterparts.

According to the articles Stuart cites, the answer is yes. For example, from the paper by Alves, Krüger and van Dijk: We aim to provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers.

Defining and quantifying ESG risks

Even though many organisations have discussions about ESG risk, not all have formal definitions, identified KPIs or systems in place to monitor them. This is especially challenging, as many are not quantifiable, and cannot be defined in terms of currency calculations.

The framework divides disclosures into four pillars — principles of governance, planet, people, and prosperity — that serve as the foundation for ESG reporting standards.

The Full Integration method is the most complete ESG strategy as it is a mix of other methods. In this approach, ESG criteria are incorporated at each step of the investment process, from picking stocks to deciding how much to invest in each of them. The investment process starts with security selection.

Amidst this global trend, BlackRock, the world's largest asset manager, has taken a bold step by transitioning its investment strategy from ESG investing to a broader approach called transition investing. This move has significant implications not only for BlackRock but for the entire financial industry.

Why is everyone investing in ESG? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).

There is a potential for “greenwashing”

Some companies may make claims about their ESG practices that are not fully supported by their actions which can lead to “greenwashing”. This may make it difficult for you as an investor to identify truly sustainable companies.

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

Globally, ESG Leaders earned an average annual return of 12.9%, compared to an average 8.6% annual return earned by Laggard companies. This represents an approximately 50% premium in terms of relative performance by top-rated ESG companies.

The ESG Investing Certificate is ideal for finance professionals who want to understand how environmental, social, and governance influence investment strategy. If you're a financial advisor, asset manager or work in risk analysis, getting ESG certified could benefit your career.

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.