What’s Going On Here?Environmental, social, and governance (ESG) investing is more popular than ever with retail investors, but one hedge fund’s professional investors made their doubts known on Thursday. What Does This Mean?According to the manager of a hedge fund that looks after $2.5 billion worth of cash on others’ behalf, most investors are well aware there’s a trade-off between the risk they take, the profit they might earn, and the ESG considerations they can prioritize. What they don’t know is just how significant the impact of those trade-offs will be.
That reveals a bigger problem: investment management firms – which have been told by regulators that they have a responsibility to get their investors the best possible return irrespective of ESG factors – might not have enough information to answer that question. And if they don’t have enough information, professional investors open to the idea of ethical investing probably don’t either – forcing them to stay on the sidelines. Why Should I Care?The bigger picture: Environmental, social, shrugganance.
That’s not the only issue facing investors: no one’s officially agreed what counts as ESG and how to calculate it, which might put them off otherwise ethically sound companies. Still, credit rating agencies made a move toward a fix last year by introducing ESG scores, while the European Union has started rolling out standardized terms that should help investors better understand what they’re getting into.
For you personally: Take that, oil!
There is research that’s shown the top ESG funds are generating better returns than their less socially responsible peers, so being ethical doesn’t necessarily have to cost you. Even this year, ESG portfolios fell by half as much as the broader market did during March’s crash. That may have less to do with ESG funds’ inclusion of eco-friendly businesses, mind you, and more to do with their exclusion of this year’s worst-performing sector: energy. | 