Investors Are Leaning Away From ESG Investing, but Here’s Why You Shouldn’t Follow the Crowd
Traditionally, the main thing investors would use to determine whether to invest in a company is how much money it made. That’s still one of the most important factors, but investors have increasingly begun to look past a company’s financials and into its role in greater society. This has been evident with the increased popularity of ESG investing (environmental, social, and corporate governance).
The environmental part focuses on how a company’s current operations impact the environment, as well as its commitment to operating in a more eco-friendly way and fighting climate change. This is particularly relevant to companies dealing with high energy use and fossil fuels. Socially, companies are graded on how they interact with employees, customers, and the greater community. Whether it’s work culture, diversity, customer data privacy, or philanthropy, this aspect of ESG lets investors know where a company stands. Governance mainly focuses on a company’s compliance, transparency, and truthfulness.
Investors are pumping the brakes a bit
Over the past few years, the popularity of ESG funds has skyrocketed. At the end of 2019, there was $1 trillion in ESG funds. At the end of 2020, there was $1.8 trillion in ESG funds. By the end of 2021, the money held in ESG funds had increased 53% to $2.7 trillion, with $596 billion being new money.
However, recently this momentum has slowed down. In the first quarter of 2022, $87 billion of new money went into ESG funds. In the second quarter, only $32.6 billion went into ESG funds, a roughly 62% decline. According to Morningstar’s Global Sustainable Fund Flow report, this largely has to do with inflation and recession fears. While both are very real issues we’re currently facing, now’s not the time to abandon ESG investing if you have the financial means.
ESG funds are far from perfect
Although ESG investing is good in its intent, investors may be rightfully concerned with the ironic holdings of some ESG funds. A fund’s objective may say one thing, while some of its holdings seemingly go against that. For example, it’s not farfetched to see supposedly earth-friendly ESG funds that contain big oil companies. It’s sort of a catch-22 for some investors: Big oil undoubtedly plays a huge role in pollution, but those companies are also making some of the largest investments in green innovations.
Investors are often right in their criticism, but that shouldn’t be cause to abandon ESG investing altogether.
Now’s not the time to pull back from investing
As an investor, the one thing you don’t want to do during down periods in the market is stop investing. If anything, these can be times to double down and get some of your favorite stocks at a discount. There’s a lot of uncertainty in the market, but the one thing you can be certain about is volatility. The quicker long-term investors realize that market cycles are inevitable, the sooner they can begin to view these as opportunities.
If you’re investing in well-diversified ESG funds containing blue chip stocks, keep your eyes on the prize and trust that they’ll weather the storm. But maybe more importantly, ESG investing allows investors to put their money into companies whose operations align with their personal values. And that doesn’t have to go against your financial goals.
A company aiming to uphold ESG standards doesn’t mean it’s not concerned with creating shareholder value. In fact, much of what ESG investing is about is identifying future risks that can harm a business. An oil company can be affected by legislation; data leaks could lead to loss of customers’ trust; and inaccurate financial reporting can leave investors unknowingly on a sinking ship (read: Enron).
ESG investing can be a way for investors to kill two birds with one stone.
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