AN INCONVENIENT TRUTH
ABOUT ESG INVESTING
T
he principles of environmental, social and governance factor investing (ESG), or “socially responsible investing”, have been around for over 200 years. It is, however, only in the last decade or so that ESG investing has really gained traction, with its popularity amplified by the Covid-19 pandemic. By September 2020, impact investing index funds had swelled to US$250 billion in the US and more than a trillion US dollars globally, with both figures having risen markedly since the start of the pandemic. While it is applied in a variety of formats, ESG investing essentially entails making investment decisions which not only
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prioritise potential financial returns but environmental and societal benefits as well, while adhering to high governance standards. The argument for ESG investing is that by investing in firms that are socially responsible, the investor is less exposed to political and regulatory risk. This in turn should lead to lower volatility of cash flows and higher profitability in the long run, which allows for greater strategic independence. On paper then, ESG investing sounds very promising. Investment returns under this framework not only consist of financial gains but societal benefits as well. But it does have some noteworthy drawbacks, too. The problem with this style of investing starts with the fact that there is no universally agreed upon definition of what ‘goodness’ is or what it
