As US wildfires rage on and COVID-19 raises ethical dilemmas, there are increasing calls to tackle social issues. This has made ESG (environmental, social, and governance) investing appealing, with “sustainable funds [having] attracted a record $51.1 billion in net flows in 2020” (Morningstar, 2021). However, despite the ESG frenzy, it’s important not to jump into ESG investing before doing your research, or the results may be disappointing.
Although many corporations label themselves as “sustainable,” some don’t live up to their claims and are misleading consumers, or greenwashing about how sustainable they really are. Jayesh Gupta, from Duke Impact Investing Group, explains greenwashing is a problem because the importance of social issues to investors causes some companies to put on a facade, such as to appear equal or diverse. According to the article “How to Tell if a ‘Sustainable’ Business Is ‘Greenwashing,’” “A Refinitiv survey ... found that 57% of the 250 institutional investors polled ... believe companies are presenting misleading environmental credentials” (Holger and Ochoa, 2020). Given the potential prevalence of greenwashing, sustainability claims may not be taken at face-value at times. Research into a corporation’s practices is crucial for impactful ESG investing.
Further complicating matters is the subjectivity surrounding ESG investments. For examples, although Max Burgers says it’s climate-positive through its carbon-offsetting projects like tree planting, IKEA thinks companies shouldn’t rely on offsets (Chaudhuri, 2019). Investors who agree with IKEA may want to invest in companies more focused on emissions reductions and should research what companies define as “climate-positive.”
Navigating the landscape of ESG investing is tricky, but fortunately, there are numerous resources available. Christine Tinker, an equity portfolio manager of $2bn in ESG focused equity strategies, suggests using MSCI, Sustainalytics, or Morningstar’s ESG rating systems. She notes that these tools rank companies differently, which adds complexity but can be advantageous by giving investors multiple perspectives. Although all this may seem daunting, don't be deterred from ESG investing. As social issues dominate society, this may be a new era in investing: one where social impact and financial success go hand in hand.