Has ESG Investing Reached its Peak?
Episode 184 – ESG investing has become increasingly popular in recent years, but what exactly is it? And more importantly, as government agencies start taking a closer look, can its success continue?
Transcript of Podcast Episode 184
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, we’ll discuss whether ESG investing has reached its peak.
Environmental, social and governance, or “ESG” investing, has enjoyed a great deal of popularity the past few years. But more recent trends raise questions as to whether the ESG movement may have peaked.
The acronym “ESG” was coined back in 2004 in a United Nations report calling for for “better inclusion of environmental, social and corporate governance (ESG) factors in investment decisions.” It took a while for the idea to catch on. The trend toward ESG investing began accelerating rapidly in 2018. In 2021, assets in ESG funds grew 53 percent from the previous year, according to data published by Morningstar.
Perhaps the biggest problem with ESG is defining what exactly it is. In the past few years, the term has become an increasingly wide-ranging buzzword for a variety of investment styles. Sometimes it means avoiding investments in things like tobacco, oil companies or gun manufacturers. Other times it means favoring investments in things like solar and wind energy.
In the past few months, another, perhaps bigger question has come up: does ESG investing actually work? Can ESG fund managers deliver competitive returns while “moving the needle” on hot button issues? There have been a number of recent industry publications that have wondered about this.
Also, the level of ambiguity as to what ESG actually means could prove to be a problem. ESG critics like to use the term “greenwashing,” which Financial Times describes as making “unrealistic or misleading claims, especially about their environmental credentials.”
The SEC is also taking a closer look. It announced a task force in 2021 to look at disclosure and enforcement issues in ESG funds. More recently, they have proposed a new set of regulations designed to ensure ESG funds are accurately describing their investments. As the SEC and others have noted, there is a lack of consistent standards for investments claiming to be ESG. Among other things, the SEC proposes that funds which are labeled ESG invest at least 80 percent of their assets in a way that lines up with that strategy.
There appears to be an active and lively debate about the appropriateness and effectiveness of ESG investing. Hopefully, further information will evolve to help inform all investors.
Could all the increased scrutiny have a long-term impact on the level of ESG investing? Time will tell.
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