ESG stands for Environmental, Social and Governance. Investing with ESG criteria considers these three factors in financial decisions. It is an investing approach that focuses on sustainability and links corporate practices to bottom line performance, with the aim of creating more stable financial returns in the long-run.

An investment process looking at ESG criteria includes the evaluation of a company’s environmental records, reports on employee satisfaction, policies on human rights, and other factors related to the “triple bottom line”: People, Planet and Profit.

The Growing Popularity of ESG Investing

In the past decade, ESG investing has grown in popularity. This growth has been driven by the knowledge that ESG criteria can improve portfolio performance and was further accelerated by some companies committing to having more sustainable practices.

As the awareness of ESG investing approaches has become more widespread, there has been an increase in investment firms looking to capitalize on it. Proponents of ESG investing claim that companies with superior ESG scores are better investments.

The Benefits of ESG Investing

  1. Increased Returns – ESG investing can bring investors higher returns with lower risk. Research has found that funds focusing on sustainability have lower volatility, higher performance, and fewer down periods.

  2. Boosted Brand Image – Many companies now recognize the importance of a strong ESG profile. Companies who have strong ESG policies can make themselves more attractive to investors and clients.

  3. Environmental Considerations – ESG investing has become an attractive option for investors that want to invest in companies that prioritize environmental considerations, such as reducing carbon emissions. Companies with a sustainability-oriented mindset can create long-term value.

  4. Improved Portfolio Performance – ESG investing can help investors achieve better portfolio performance by minimizing the potential for negative impacts of irresponsible corporate practices.

The Rising Backlash Against ESG Investing

Despite the enthusiasm and increased attention it is receiving, there is still some backlash against ESG investing. The criticism is primarily centered on the fact that it has not been proved to be successful, and some skeptics argue that an ESG-based portfolio carries higher risks.

  1. Negative Returns – Critics of ESG investing argue that, due to the focus on screening out undesired companies, investments may fail to be sufficiently diversified, leading to subpar returns.

  2. Rigid Criteria – Many disagree with the ESG criteria used to evaluate corporations, arguing that it is too restrictive and can lead to an overemphasis on certain issues.

  3. Manipulation – ESG investing is also vulnerable to manipulation by clever companies, who can falsely claim they are following sustainability practices to attract more investors.

  4. Dilution of Investment Focus – Opponents also argue that focusing on ESG criteria can distract investors from making informed investment decisions.

Should You Invest in ESG-Based Portfolios?

Despite the growing criticism, many investors do not see ESG investing as a trend but rather a way to refine their portfolios. ESG investing is here to stay and if implemented correctly, it can bring many benefits.

The decision whether to invest in ESG-based portfolios should be made after careful evaluation, and once investors have decided, they should monitor the performance of their portfolio and adjust it as necessary. Before investing in any portfolio, it is recommended to do thorough research about the company and the ESG criteria it follows.

ESG investing has become an increasingly popular way for investors to align their portfolio with their values. It has many potential benefits, and investors should consider the pros and cons of investing in an ESG-based portfolio. Ultimately, ESG investing should be an informed, intentional decision, and investors should consider the risks and potential rewards before deciding whether or not to invest.