ESG Investing, Sustainable Investing, Or A Marketing Ploy?

Sustainable investing is hot lately. It is a world that is finally waking up to the notion that environmental, social, and governance (ESG) issues because we are living in a world that continually bombarded by serious ESG issues. The concept picks up environmental concerns (e.g. climate change and sustainability), social concerns (e.g. diversity, human rights, consumer protection, and animal welfare), and corporate governance (e.g. executive pay, employee relations, and compensation). Whether it is a business, a nonprofit, an educational institution, or a government entity take a concern to handle ESG issues because of the ability to added value to the organization and affect the organization’s long-term sustainability.

The share of global investors that have applied ESG criteria to at least a quarter of their total investments has jumped from 48% in 2017 to 75% in 2019, according to data from audit firm Deloitte. One of the reasons the charts are rising so fast is a generational shift in attitudes. It’s the Millenials who are rapidly becoming the owners of more assets than the older generation. Millennials are much more likely to make sustainable investing a priority than other types of investing. They care more about causes and as change leaders and segments that will control a larger part of the wealth in the future, companies, asset managers and advisors need to understand that their vision of values-based investing is to do as much good as they can. The financial impact may be secondary and they just want to avoid supporting ‘les enfant terribles’ of the corporate world.

In Indonesia alone, 171 companies from 16 industrial sectors perceived that ESG has not been consistently implemented even though is important because it can support the company’s sustainability, according to the 2019 National ESG Survey by the Indonesia Center of Risk Management and Sustainability (CRMS). From the data obtained it turns out that 25% company’s in Indonesia implemented ESG due to stakeholders’ requests, and only a small proportion implemented it because they realized that there is a positive relationship between ESG implementation and profitability. Let’s say that in general, ESG is still perceived as a theory or concept that is well accepted but actually not urgent enough or necessary to implement.

In the same way that terms like “Diet”, “Organic”, “All Natural” and “Green” are often misused and misleading, ESG labelling for stocks and index funds feels a little nasty. Another problem is that in some cases ESG can be used as a marketing ploy and a way for companies to get free money. There’s really no standard definition of the best practices and sustainability researchers could well have their biases creeping in. Some companies qualify based on stated goals rather than actual progress. So it is important to look beyond the label and read the disclosures of what you are investing in. How different are some of these ESG investments to standart index investments?

However, as suggested, following the crowd on ESG activities is not the answer. To gain a competitive advantage, firms should instead focus on the ESG issues that are financially material for them and pursue those in distinctive ways.

You have to dig a little deeper to understands what the ESG index funds you’re considering investing in are comprised of. Look for the use of independent sustainability ratings, such as Vigeo, Sustainanytics, FTSE Russell, and DowJones Sustainability. Review the way asset managers report on the performance of funds. For example, do they monitor the extent to which they have addressed sustainability challenges rather than just reporting on growth? Ask if they are willing to be transparent about the makeup of their fund or portfolio, or do they just give the names of the top contributors?