ESG Is Just Getting Started
In his paper, “The Case Against Social Responsibility,” Robert Reich wrote that the corporation “must, for competitive reasons, resist doing anything that hurts—and will place a very low priority on anything that doesn’t help—the bottom line.”1 And yet, the popularity of ESG investing, as evidenced by the sheer number of assets invested in sustainable and responsible investments and the increasing number of ESG offerings in the market, seems to suggest otherwise. When sustainability‐minded investors put money toward a chosen company or organization, they do so in the hopes that their investment will provide a financial return and drive measurable social and environmental change. This market for values‐driven sustainable investing is already enormous and continuing to climb. Add in the fact that younger generations, like Millennials, who typically get their start investing in a company‐sponsored retirement plan, like a 401(k) plan, are already favorably inclined toward ESG investing (so their investments can better reflect their views on sustainability and social change); it seems safe to assume that ESG investing will only continue to grow as part of the investment landscape. With the increasing shift of companies moving from offering defined benefit plans to opening up defined contribution plans instead, the burden of saving and investing for retirement has clearly been placed on employees' shoulders. Because of this, it is that much more important that employees feel connected to their savings goals; hence, a primary reason that many Millennials have opted to invest in ESG investment funds within their 401(k) plans, and afterward, if they have rolled this money over into an IRA.
Generational Wealth Transfer
Couple all of this with the $30 trillion of wealth expected to transfer from Baby Boomers to Gen X and Millennial beneficiaries in the next 10‐20 years; there does not seem to be an end in sight for the potential for ESG investing.2 Despite this expectancy for massive growth, recent regulations in the U.S. have put a damper on the prospects for ESG investing, especially as it relates to investing within qualified retirement plans like 401(k) plans. Whether this crackdown on ESG regulation will reverse under the Biden Administration remains to be seen, but the prospects look good for this important change. Plus, some pundits still believe that ESG investing is just a marketing ploy or a stock bubble, similar to the tech bubble of the early 2000s.3
Changes Are Coming
Regardless of which side the experts are on, it seems clear that ESG investing is here to stay. Enhanced consistency, comparability, and transparency in the reporting and oversight of ESG metrics should give investors a much better sense of the viability of each company and allow them to differentiate each investment from its competitors, which should lead to better overall decision-making.4 Despite widespread use, the integration of ESG standards into traditional investment analysis is still relatively new.5 But even so, these standards can be applied qualitatively and quantitatively to produce better decisions.6 As ESG investing matures, it is poised to become increasingly important in the traditional investment management space, and investment professionals could be more apt to embrace these ESG standards in the future. Furthermore, if we overlay the premise of the two‐level model of sustainable finance and view ESG investing through this larger lens, the evidence suggests that there is a need for an overhaul of the financial system that better marries the often competing goals of individual financial agents and society as a whole.7 While this theory, on the surface, seems to be able to answer several questions concerning the role of increased regulation, division of labor, increased individual awareness, and fiduciary responsibility to stakeholders and society as a whole, there is much that still needs to be considered if it were to be put into widespread practice. With that said, though, the underlying premise is that for this theory to work, there needs to be some shared values of what is important to society from an environmental, social, and governance perspective8—all aspects of ESG investing.
Already A Reality
Lastly, as the popularity of ESG investment increases, the degree to which companies adhere to financial and ESG standards may determine how attractive they are to all types of investors. Based on this, it is reasonable to assume that the interest in ESG investing is neither a fad nor a short‐term trend and could lead to society adopting a more qualitative approach to how it views growth. Could it be that Milton Friedman’s premise that companies should try to pursue profit above all else and, in that pursuit, will accomplish good as a consequence, is being turned on its head?9 It certainly appears so since ESG investing can no longer be categorized as the future of investing. It is already a reality today.10
I hope you enjoyed the final post in our series on Environmental, Social, and Governance (ESG) investing. Check out other posts in the series here:
(1, 9) Yamada, M. (2019, June 13). “Is Corporate Social Responsibility Just a Marketing Ploy”. Retrieved from Advisor’s Edge: https://www.advisor.ca/columnists_/mark‐yamada/is‐corporate‐social‐ responsibility‐just‐a‐marketing‐ploy/.
(2) 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.
(3) Dillian, J. (2020, October 5). "ESG Investing Looks Like Just Another Stock Bubble". Retrieved from Bloomberg, L.P.
(4) Jeffers, A. E., Romero, S., & Aquilino, F. (2018). "The Increased Demand for Transparency on ESG Roles and Metrics in Sustainability Investing Strategies". Retrieved from Northeast Business & Economics Association Proceedings, p 143‐145.
(5-6) Orsagh, M. (2019, April 1). "Integrating ESG Standards: Qualitative and Quantitative Approaches". Retrieved from Business Ethics: The Magazine of Corporate Ethics: https://business‐ ethics.com/2019/04/01/integrating‐esg‐standards‐into‐investment‐analysis‐qualitative‐and‐ quantitative‐approaches/.
(7-8) 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=.
(10) Christensen, M., & McCormick, C. (2021, March 26). "Don’t Mind the Naysayers. ESG Investing Is Here to Stay". Retrieved from Barron's: https://www.barrons.com/articles/dont‐mind‐the‐naysayers‐ esg‐investing‐is‐here‐to‐stay‐51616700713.
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.