The World is Changing
In a world full of uncertainty, especially as it emerges from the COVID‐19 global pandemic, economies are faced with the monumental challenges of climate change, poverty, increased debt, and a growing inequality between the proverbial “haves” and “have nots.”
But, if the sole purpose of businesses under a typical capitalist ideology is to maximize profits, then how do these challenges fit into the overall mission, values, and goals of these organizations? Can businesses really make a difference by adopting a more sustainable business strategy? And do they even want to?
With the advent of environmental, social, and governance (ESG) investing, businesses have been forced to contend with a growing investor population that is demanding answers from them on how they plan to address such issues as supporting climate change practices, investing in sustainable natural resources, using fair labor and equal employment standards, defending human rights, adopting fairer executive pay scales, and attracting more diversity on its board of directors to name a few.1 The way in which these companies manage these issues could have a direct impact on their bottom lines.
Time For Reform?
In light of this, it would seem that a growing discontent in society exists with respect to the functioning of financial agents and markets.2 The Great Recession of 2008‐2009 clearly highlighted how misaligned incentives and poor regulations and oversight caused extreme and detrimental risks to both the financial system itself and society as a whole. Furthermore, there is a growing sentiment that this same dominant system is unable to address some of the more pressing sustainability challenges of our times, such as global poverty, inequality, and the threat of climate change. This has led some to suggest that the global financial system is in need of reform.3
Shared Goals & Values
Today, many people, especially younger generations, like Millennials and Gen Z, want their investments to reflect the social and environmental goals that they support and are very interested in investing in those companies that share these same goals.4
If a company fails to live up to the standards of these investors, it could not only lose the financial support from these individuals, but it also faces the potential for a much greater reputational risk that could lead to an even steeper decline of its profits.5 But this seems to go against the traditional capitalist theory (and dominant economic view) of maximizing shareholder value at all costs. If so, then is it really possible for ESG investing to have a broader impact on the investment world at‐large? Studies have shown that Millennials will be a major holder of wealth within the next 10‐20 years.6 As many investors in the U.S. get their introduction to investing through a company‐sponsored retirement plan, it would seem that having access to ESG funds in a 401(k) plan would be a natural way for employees to become more exposed to this type of investing. Since Millennials are already more inclined towards ESG investing, and since they will represent 75% of the total U.S. workforce by 20257, and they are poised to inherit (along with their Gen X counterparts) over $30 trillion in assets within the next 10‐20 years8, this generation invests differently than its predecessors and just might be the key to making ESG investing a household name.9 Thus, it would seem that ESG investing is here to stay.
More Questions To Be Answered
So, if the contemporary way of thinking in terms of profits and economic efficiency is no longer of consequence, then how should it be defined? And, if this is the case, can ESG investing be used to change the way in which the value of companies are assessed, and, ultimately, change the way investors measure growth? Furthermore, is ESG investing really a valid way to manage money or is it just a marketing ploy? And, is it really possible to make money and save the world all at the same time?
Through an extensive literature review, and my own experience as a financial professional for the past 30 years, my research suggests that the answers to these questions are already evident in the proliferation of ESG funds that are offered and the number of investors that simply want to invest their money in a way that better reflects their societal views. Furthermore, this link between younger generations, 401(k) plans, the two‐level model of sustainable finance, and the regulatory framework that exists around ESG investing provides ample evidence that ESG investing is more than just a marketing ploy and will continue to be a force in the investment world for years to come.
I hope you enjoyed the first post in a seven-week series on Environmental, Social, and Governance (ESG) investing. Check out other posts in the series here:
The Theory of Sustainable Finance
What Is The Triple Bottom Line?
The Popularity of ESG Investing
1 Broadridge Investor Communication Solutions, Inc. (Accessed 2021, April 23). "Growing Interest in Socially Responsible Investing". Retrieved from https://www.broadridgeadvisor.com/kt/HtmlNL.aspx?pvw=A9FDFD0F708BBE2F96665A46E3B8F 96BC712956751ACE7A5BACA6AB6F4AA678EA2B%E2%80%A6.
2, 3 Sandberg, J. (2015, October). "Towards a Theory of Sustainable Finance". Retrieved from United Nations Environment Programme: https://wedocs.unep.org/bitstream/handle/20.500.11822/9860/‐ _Towards_a_Theory_of_Sustainable_Finance‐2015Towards_a_Theory_of_Sustainable_Finance.pdf.pdf?sequence=3&%3BisAllowed=.
4 Bourgeois, J., Massey, J., & Perlow, M. (2019, December). "ESG Investing: Considerations for U.S. Registered Investment Advisers". Retrieved from The Investment Lawyer, Volume 26, No. 12, p. 18‐25.
5 Kossovsky, N., & Williamee, D. (2021, May). "Beware the Sirens of Environmental, Social and Governance Investing". Retrieved from Best's Review, Volume 122, Issue 5, p. 48‐50.
6, 8 Choi, A. (2018, January 24). "How Younger Investors Could Reshape the World". Retrieved from Morgan Stanley Wealth Management: https://www.morganstanley.com/access/why‐millennial‐ investors‐are‐different.
7, 9 RBC Wealth Management. (2022). "Five Ways Millennials Can Get Started With Investing". Retrieved from rbcwealthmanagement.com: https://www.rbcwealthmanagement.com/en‐ us/insights/advice‐to‐millennials‐start‐investing‐now.
The views expressed within this newsletter are subject to change at any time without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security or strategy.
This material has been distributed for informational purposes only. All investments carry certain risk and there is no assurance that an investment will provide positive performance over any period of time. Because ESG criteria excludes some investments, ESG strategies may not be able to take advantage of the same opportunities or market trends as those that do not use such criteria.
John Chichester is an Investment Advisor Representative with Dynamic Wealth Advisors dba Chichester Financial Group LLC. All investment advisory services are offered through Dynamic Wealth Advisors.