3 common myths on ESG

Jun 14, 2023
 

Political scientist-turned fund analyst-turned lead commentator for Morningstar on sustainable investing, Jon Hale is passionate about the subject. Hale is now retiring from Morningstar, although he’ll continue to write regularly about sustainability and to work on special projects.

Myth: SRI and ESG are the same.

Socially Responsible Investing (SRI) excludes certain kinds of businesses and attempts to engage with companies on mitigating pollution and other issues.

Environmental, Social, and Governance (ESG) analysis is more concerned with "value" than "values". ESG represents longer-term material risks and opportunities that companies face that aren’t easily illuminated in traditional financial analysis. It’s data, information that investors can use to identify companies that are likely to be sustainable, meaning profitable and purposeful for the long term. Asset managers use ESG to help them make informed decisions.

Myth: ESG and Sustainability are the same.

Sustainability is about being mindful about one’s impact on the environment and other people, present and future, when making decisions and taking action. A sustainable business is managed with a view to generate profits alongside positive results for other stakeholders. They seek better outcomes for people and the planet.

ESG raises issues relate to how a company manages its environmental impact, its operations, its people, the supply chain, and best practices in corporate governance. It enables investors and asset managers make more holistic decisions. Companies have started publishing sustainability reports and talking about this broad concept of sustainability. They’ve embraced ESG because it gives them a framework for addressing the most-relevant issues rather than talking generally about sustainability.

The terms are related and often used interchangeably.

ESG issues are useful indicators of sustainability, but just because a company does well on the material ESG issues affecting its business doesn’t mean it has a business model that will last into the future that can generate profits for shareholders along with positive results for people and planet.

Myth: Sustainable Investing delivers poor returns

The biggest myth is the idea that ESG or sustainable investing must underperform. The claim is that if you limit an investable universe based on non-financial criteria, then almost by definition, you’re going to underperform. There might be times when that happens, but diversification and the use of portfolio optimization techniques can overcome it. And even more to the point, a focus on material ESG issues is certainly not irrelevant to performance.

Another common misinterpretation is a sustainable fund is about sustainability first and investment returns second. Not true! The main purpose of a sustainable investment is to provide competitive risk-adjusted returns just as it is for a conventional investment.

Sustainable Investing is about profits, not taking a stand

ESG is not about feeling good, but understanding risk and impact

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