In recent years, ESG (Environmental, Social, Governance) investing has quickly transformed from a “nice to have” trait to an essential part of a company to capture market share and attract investors. It is believed that companies that perform well in ESG criteria which are perceived as responsible would be sustainable and yield long-term growth. But is that really the case? In this article, we will explore the reality of sustainable investing in terms of both its financial performance and the real impact on the environment.
One of the major concerns for investors on whether or not to invest in an ESG-related stock is definitely its financial performance- will they generate returns that are on par with its alternatives or even outperform them? In reality, there are more than 2,000 studies exploring this issue, and around 70% found a positive correlation between ESG scores and financial returns, whether measured by equity returns or profitability or valuation multiples.1 In particular, a research by the S&P Global Market Intelligence has shown that out of the 27 ESG exchange-traded funds and mutual funds, more than half of them outperformed the S&P 500, with growth rate ranging from 11% to 29.3% as compared to the S&P 500’s 10.8%.2
Another concern amongst investors is whether or not this outpour of capital has really generated positive impacts on the environment. Undoubtedly when companies raced to net zero, it would emit less greenhouse gases and hence alleviate the climate crisis. However, the so-called “green” funds might not be as green as we thought. Some funds labelled with ’climate change’ have actually included car manufacturers and oil companies like ExxonMobile in their portfolio3. These are clear demonstrations that green-washing is a prevalent phenomenon, hence undermining the real impact on the environment.
Why ESG is here to stay. (2020, June 15). McKinsey & Company.
Whieldon, E., & Clark, R. (2021, June 16). Most ESG funds outperformed S&P 500 in early 2021 as studies debate why. S&P Global Market Intelligence. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/most-esg-funds-outperformed-s-p-500-in-early-2021-as-studies-debate-why-64811634https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/most-esg-funds-outperformed-s-p-500-in-early-2021-as-studies-debate-why-64811634
‘Green’ funds can fall short of buyers’ expectations. (2019, May 13). Financial Times. https://www.ft.com/content/644c1ec4-39d9-11e9-9988-28303f70fcff