ESG Investing: Skepticism and Cutting Through the Noise

Investing using an environmental, social and governance (ESG) approach is becoming increasingly popular among investors across diverse industries. 

ESG risk ratings can be helpful when selecting companies to invest in, but it’s often difficult to assess how well companies are actually doing at meeting ESG standards.

To find out how investors can cut through the noise when looking at ESG credentials, as well as what steps to take when starting to use this strategy, the Investing News Network (INN) spoke to analysts and experts to get more insight on ESG investing today. Here’s what they said.

Using an ESG approach when investing

Even though ESG might seem like a new term now that it’s appearing everywhere, it was coined back in 2004 and its roots can be traced back to the 1960s.

“ESG is not something new,” Federico Gay of Refinitv told INN. “It’s been around for about 20 years, at least on the mining front, but there’s been a lot of pressure, especially lately, for trying to understand what’s the real effect on mining,” he said. “And within that learning process, companies have been changing their reporting style as well, and how they report metrics.”

In the past year, Mark Hays, director of sustainable and impact investing at Glenmede, has seen COVID-19 and social justice movements amplify the level of interest in social factors in investment analysis.

“This focus has increased investor focus on company disclosures on areas such as dependent care, workforce safety and diversity and inclusion policies,” he said.

Glenmede, which has been formally building portfolios with an ESG lens since 2001, focuses on ESG issues it believes are financially material and can drive sustainability or impact outcomes.

“The most critical aspects for an individual company vary by a company’s sector and business focus, based on what we believe are the most financially material to corporate financial performance and outcome orientation going forward,” Hays said.

While Glenmede sees both strong and weak ESG actors across sectors, on average technology companies have tended to lead the charge, particularly on environmental and social issues. “Industrials companies have historically tended to lag from an ESG standpoint, although we’ve seen significant improvements and strides, with many bringing a greater focus to these issues going forward,” Hays said.

On the mining front, Gay said investors are demanding more details every year, and companies are responding well to this requirement.

“Although plenty of metrics are currently available, in my view we are still very ’emission-centric,’ while there are several other important metrics that should be also considered,” he commented to INN. “We should amplify our scope on what ESG is. ESG is not only carbon emissions, there are a lot of other metrics and pillars that we need to focus on.”

Skepticism about ESG investing still around

While ESG is a concept that is relatively new to many, the issues addressed by the variables it covers are well known to investors. However, some still have doubts about how an ESG strategy can potentially improve the performance of their portfolio.

Generally speaking, Hays explained, skepticism remains rooted in a perception that there is an element of sacrificing returns. That’s due to the fact that for much of the 20th century, the utilization of ESG in portfolios was built around excluding specific sectors — such as fossil fuel or weapons, for example — from an investor’s portfolio.

“However, over the past decade, this space has evolved due to an explosion of ESG data availability, giving investors a wider set of approaches to utilize, and yielding an increasing amount of academic studies that point to not giving up, or a positive effect on returns from doing so,” he added.

Speaking with INN about ESG investing, Leslie Samuelrich, president of Green Century Capital Management, said some of the skepticism that remains is inertia — the fact that investments have always been done in a certain way.

“Some of it is also outdated notions (from financial advisors) — they just don’t know the current data, both about how ESG ratings may help performance, but also about what their clients want,” she said.

For his part, Gay said confusion around ESG from investors and stakeholders could come from trying to compare different metrics for different companies.

“One tends to compare direct metrics,” he said. “So if last year I produced X amount of carbon emissions, and this year I produce X plus one, (investors should also look at) maybe my production increased from 7 percent to 10 percent and I actually proved to be more efficient.”

Another misconception when it comes to ESG metrics is to compare different processes, Gay said, giving the example of how within base metals the mining process for copper is different to nickel.

“So I think the best way to compare the industry is metal by metal,” he added.

That said, for the analyst, currently, some metrics lack a “common ground.”

“When looking at raw data, the differences between the different commodities are noticeable at plain sight,” Gay noted. “The biggest challenge is, probably, to adapt to the year-on-year changes in the reporting style and metrics availability.”

Suggestions for investors new to ESG

Hays sees significant growth for sustainable and impact investing given two converging trends.

“One, we see pronounced interest, particularly from Millennials and Generation X, to align their capital with strong ESG companies. Both generations (are) set to inherit significant wealth going forward,” he said. “Second, we see continued strong evidence academically and in practice that aligning ESG with values does not necessitate a sacrifice of returns, and in some cases can result in outperformance.”

Giving his best suggestion to investors new to using this strategy, Glenmede’s Hays said to focus on intentionality and outcomes. “Investment strategies should be assessed based not only on the point-in-time ESG quality of their holdings, but also on the intentionality of their process,” he said.

“Investing with a strategy with DNA built into the core of their process will result in a more consistent and repeatable set of ESG and impact outcomes over time.”

For Samuelrich, ESG is just one part of how people can invest responsibly — and it’s usually the first step.

“The way that best aligns with people’s values is if they also screen out certain sectors or certain industries,” she added.

Green Century Capital Management uses ESG ratings as one part of how it selects companies for its three mutual funds. Since 1991, the firm has used ESG to invest in companies leading their sector.

“ESG is one tool,” Samuelrich said. “It does not mean that your portfolio is making a demonstrable impact in the world. It’s more about the performance of your portfolio.”

If investors are looking to have a moral alignment in their portfolios, they need to do screening, and to have an impact, investors need to do shareholder engagement, which are layers on top of ESG ratings.

Samuelrich suggested that those new to this approach should figure out what issues they care about the most. “Then I would have them look for a mutual fund that excludes those kinds of companies they are most worried about, and also uses ESG ratings for the rest of the companies that are held,” she said.

“I would always steer people into mutual funds or exchange-traded funds, rather than individual stock picking, because that takes more time and expertise.”

For investors interested in using this approach, INN looked at ETFs and mining stocks with high ESG ratings to consider. Click the links to learn more.

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Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.