• The coronavirus pandemic has shone yet more light on how investors allocate their money and how company operations influence our societies.
  • But there are questions about whether ESG is really effective in improving and supporting our communities. 
  • A portfolio manager told CNBC that companies can “hide” their actual carbon footprint by outsourcing parts of their production process.

Is sustainable investing just a marketing ploy?

UP NEXT

UP NEXT

LONDON — There’s growing appetite to invest in a more sustainable way, but experts warn that transparency is needed in this space if it’s to really do any good for the planet.

Loading...

Load Error

ESG (environmental, social and corporate governance) describes investments made with an aim to contribute to a better environment, society or workplace and it’s becoming increasingly popular. The share of global investors that have applied ESG criteria to at least a quarter of their total investments has jumped from 48% in 2017 to 75% in 2019, according to data from audit firm Deloitte.

And this is only expected to keep rising.

In the U.S. alone, professional investors could have 50% of their total investments in ESG assets in the next five years, data from Deloitte also showed.

“There is this increasing understanding in society that we need to care about the climate, about social conditions of employees,” Zacharias Sautner, a professor of finance at the Frankfurt School of Finance & Management, told CNBC last month via Zoom, adding that this is being reflected in the way investments are made.

The coronavirus pandemic has shone yet more light on how investors allocate their money and how company operations influence our societies. For instance, a number of multinationals have announced in recent months new measures to ensure a more equal workplace. 

But there are question marks on whether ESG is

There are people, some of them financial advisors, who believe that you cannot make money through sustainability, social justice and ESG investing. (ESG stands for environmental, social and governance investing.) To be accurate, people don’t say you can’t make any money on these investments, just not as much money as you would if you didn’t factor in those considerations when picking your investments. Let’s put this to rest right out of the gate. John Hale of the renown MorningStar investment research firm has said that’s not true. And Morgan Stanley’s Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds survey came to the same conclusion. It determined that the returns of sustainable funds were in line with comparable traditional funds by looking at the performance of nearly 11,000 mutual funds from 2004 to 2018. In fact, the report concluded that there were no statistically significant differences in total returns. An interesting kicker was that the sustainable funds may offer lower market risk. These funds experienced a 20% smaller downside deviation than traditional funds. If you’re like most investors, the downside is what you find scary, not the upside.

For this first article on socially responsible investing, we’ll look at two topics related to getting started: advisor selection and investment screening. We’ll also cover one benefit of ESG investing: risk mitigation.

Advisor selection

If you’d like to pursue (or even explore) socially responsible investing with an advisor, you’ll need a particular type of advisor. Margaret Towle’s “Environmental, Social and Governance Investing: Myths versus Reality” discusses the problem with advisor selection. Many advisors simply don’t believe good returns are possible from these types of investments. Therefore, they have not researched them. Some of them are with companies that don’t have agreements with a diverse number of mutual fund managers, resulting in

Environmental, social and governance investing, or ESG investing, has been a growing movement over the last decade. Investor demand for stocks and funds that consider more than just the bottom line is booming.

ESG investing is often associated with excluding energy stocks and sin stocks, but new reporting suggests that perhaps big banks might be larger ESG offenders than the investing public tends to believe.

Recent news reports highlight some startling issues that raise questions about the role of some big banks in global money laundering activities, with suspicious activity reports, or SARs, filed by banks with the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCEN.

The files indicated that some of the world’s biggest banks kept moving money for suspected criminals even after previous prosecutions or fines for misconduct. The troubling client list runs the gamut from alleged narco-traffickers to suspected Ponzi scheme operators, terrorist financiers, plunderers of sovereign wealth funds, money launderers, Russian mob figures and companies skirting sanctions.

The Social Aspect of ESG

This raises questions about whether more big banks are involved or complicit with money laundering – and not just money laundering, but on a massive scale, repeatedly, with criminal clients.

That said, there are qualifications to FinCEN investigations that investors should understand, says Megan Prendergast Millard, senior managing director of financial and regulatory compliance services at Guidepost Solutions.

“Once a SAR is filed, that is not a final determination by the bank that there is criminal activity – that decision is ultimately the responsibility of law enforcement after a thorough investigation of the allegations included in the SAR. Most banks are not intentionally repeatedly doing business with criminal enterprises,” Millard says.

Unfortunately, the government has been largely ineffective in reviewing these SARs, with a shrinking number of staff and more files to review,

A trend decades in the making

In 2020, ESG’s time may have finally come. Investing based on environmental-, societal- and governance-oriented principles is a trend influencing fund development, government regulations and attracting investor fund flows. It can be a complicated topic, particularly if you’re trying to find the best approach. The good thing for investors is that there are a myriad of approaches to ESG investing. The bad thing for investors is that there are a myriad of approaches to ESG.

ESG is a topic I love to hate. Not because of the intent of it, but more because many of the methodologies now in play try to distill seemingly subjective decisions into a “check-the-box” type of exercise. In some cases, good and responsible companies may be left out of a portfolio or, in other cases potential exclusions were missed. This summer, fashion company Boohoo made headlines when news broke that despite being given a high grade by many ESG ratings services, the company paid workers in its supply chain less than minimum wage and subjected them to unsafe working conditions.

No methodology is perfect, whether trying to identify good ESG companies or good large-cap quality growth companies. Ultimately it comes down to understanding the methodology, its biases, and whether or not it aligns with your intent. I actually love the idea that investors are increasingly requiring that their investment dollars align with their values and if doing good doesn’t materially impact returns, why shouldn’t everyone do it?

In 2020, ESG strategies generally have performed relatively well and record flows into ESG funds have followed. Performance, as I discuss with Mark, is also a complicated or at least nuanced topic. We discuss SRI (Socially Responsible Investing) the precursor to ESG and the long held perception of performance concessions with such

One of the more interesting events of the past week was the sacking of Cardinal Giovanni Becciu, who amongst other duties was responsible for the Vatican’s ‘sainthoods and beatification department’. He was, as a circuit court judge might put it ‘no saint himself’, and despite his pleadings of innocence that it was all ‘a misunderstanding’, his involvement in a number of dubious property transactions was enough to end his career.

This is not the first financial scandal in the Vatican to put it mildly, and in general the relationship between finance and religion is usually not a close one (relatedly German academics have found an inverse relationship between trustworthiness and willingness to work in the financial services industry).

God’s Work?

Apart from the pronouncement by the former chief executive of Goldman Sachs that the bank was doing ‘God’s work’ there are few people who think religion and finance go hand in hand. One exception was Sir John Templeton, whom I had the honour to meet a number of times.

However, the idea that finance can do good, and shape the world in a progressive way has gained some credence with the rise of ESG (Environmental, Social and Governance) investing. Together with the fast growing ETF (Exchange Traded Fund) industry, ESG is now one of the hottest areas in investment management (ESG ETF’s are therefore very hot).

Sin Stocks

The premise of ESG investing is to better direct capital away from ‘sinning’ companies (e.g. tobacco