[WINii] Are ESG funds actually good for the environment?

Hi WINers!

Let’s be exceptional this week: exceptional in our responsibility as global citizens.

Have you considered investing in ESG (environmental, social, and governance) funds? Through them, you could do good for your portfolio and the world…however, there may be a catch.

On a career note, we'll cover what makes an exceptional product manager. 

Let's get this party started! 🎉

🌍 ESGs: How "Good" Are They?

Over the last several years, environmental, social, and governance funds (ESGs) have created quite a buzz. 

They're a type of investment where non-financial factors are considered when making decisions about what's included in the fund. The idea is if we collectively invest more money in ESG funds, it will pressure companies to be more responsible…and money makes the world go round. 🌍

However, from a return perspective, are ESG funds good for your portfolio? The verdict is mixed. 

• In this study, evidence suggests that sustainability is viewed as positively predicting future performance. However, researchers didn't find evidence that high-sustainability funds outperform low-sustainability funds.

• Here, researchers found that socially responsible investing (SRI) neither outperforms nor underperforms the market portfolio. However, they did find that global SRI portfolios outperform regional sub-portfolios.

If ESG returns aren't outperforming the market, are they at least better or more humane for the world? The verdict is mixed here, too.

• This study found that increasing financing costs for firms that are already green (environmentally-friendly) doesn't have a huge impact or lead to significant improvements. On the flip side, increasing financing costs for brown (not environmentally-friendly) firms results in a significantly negative impact. Thus, directing capital away from brown firms and toward green firms may be counterproductive. Yikes!

• Some ESG funds have also been accused of "greenwashing", meaning they exaggerate environmentally-friendly initiatives to appear greener than they actually are. The SEC recently announced a new rule that requires ESG funds to match at least 80% of their portfolio with the stated goals of the fund. The rule was issued in response to a number of subpoenas issued by the SEC to fund managers over questionable ESG practices. Although this crackdown is ethically and morally good, it may have a negative impact on how a fund performs. 

Bottom line: the concept of ESGs may be laudable, but more work is needed to know for sure. 

Do you take environmental, social, and governance factors into account when creating your investment portfolio?

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