ESG Investing Myths Debunked
One of the hottest topics today is sustainable investing, or ESG investing (Economical, Social & Governance). As the purchasing power shifts towards a generation that’s environmentally conscious, socially progressive, and ethically governed, the traditional investing strategies offered by professionals has become obsolete. Topics like gender equality, diversity of thought, clean energy, waste management, net-zero economies, executive compensation, and company transparency are now at the fore-front of investing discussions. I became passionate about digging deeper into how companies, investing firms, and investors reacted to this evolution.
Before getting into the typical counter-arguments for sustainable investing, we need to first agree on the purpose of investing, and more importantly our expectations. To be clear, investing is not gambling. Investing is not a get-rich-quick method. Investing is a personal, methodical, and sometimes emotional, financial plan to grow your wealth. You may not achieve your financial goals immediately, but if you invest with the purpose of achieving long-term growth and remain diversified, there is no reason you will not succeed.
Myth #1 - “Sustainable investing is difficult and time consuming.”
One of the easiest and most popular ways to diversify your portfolio is to “index & chill”. Exchange traded funds (ETFs) have taken over the investing world. I like to think of an ETF as buying a packaged product. Buying one share of an ETF could mean purchasing a small percentage of hundreds of companies. An ETF could be as broad as matching the S&P 500 index (the top 500 US companies), or very narrow, such as an ETF that only invests in companies that produce clean energy.
According to the 2021 Sustainable Funds US Landscape Report produced by Morningstar (a well-respected investing research company), there are 392 US sustainable funds, representing a 30% increase from 2019. A record 71 new funds were created in 2020, almost doubling the previous high mark of 44 in 2017. Since 2013, 69 funds repurposed to be sustainable focused. More impressively, sustainable funds had a net flow of $51.1b in 2020. Yes b as in billion. This is twice the record set in 2019 and represents roughly a fourth of all fund flows in the US.
Clearly, sustainable investing is becoming increasingly popular. And now, you can easily invest sustainably by purchasing a share of a sustainable ETF. Unless you have the time to review each of the 392 sustainable funds (like I have), I’ll point you to the top 3 popular funds (based on assets under management):
ESGU: iShares ESG Aware MSCI USA ETF ($13.4b in assets under management)
ESGE: iShares ESG Aware MSCI EM ETF ($6.1b in assets under management)
ICLN: iShares Global Clean Energy ETF ($4.7b in assets under management)
For example, by purchasing into these 3 ETFs, you would (1) be investing into companies that have favorable environmental, social, and governance practices, (2) be diversified by company size, market sectors, and geographies, (3) pay much lower fees than your average mutual funds, and (4) achieve at or above market returns. Sustainable investing isn’t that hard, is it?
Myth #2 - “Investing sustainably doesn’t really make a difference.”
In my opinion, a lot of today’s issues are caused by how short-sighted we are. That’s especially true in many corporations, where CEOs are measured and rewarded based on the company’s stock price. The stock price is determined by how investors value the company, which in turn is determined by the opportunity to generate profits in the future. Not many CEOs are willing to put “be environmentally and socially friendly” as their #1 goal, as it won’t necessarily generate the most profit in the short-term.
However, certain companies are thriving by focusing their products/services to be …
environmentally friendly (think electric cars, sun/wind powered energy, hydrogen fuel cells, etc.)
employing world-class talent (which means diverse in gender, ethnicity, sexual orientation, religion, etc.)
governing responsibly (compensation based on metrics that drive long-term business value, maintaining a close gap between executive compensation and average employee compensation, being transparent with who you work with and how you get business done, etc.)
Furthermore, governments have a huge stake in the longevity of their country, and are increasingly funding environmental and social initiatives, which benefit these types of organizations in the long run.
Just like choosing whether you recycle at home, you bike/walk or drive a car that has lower carbon emissions, or only purchase products from companies that do good for the world, your investment decisions matter. When investors start putting more weight on how much good a company does in the world, companies listen (some faster than others…). Just look at the number of ESG funds that have either launched or repurposed. Look at the number of companies that issue annual reports on their ESG impact. How you use your hard-earned capital makes a difference, and I hope sustainable investing becomes the new norm.
Myth #3 - “Sustainable investing have lower returns.”
As I defined earlier, investing is a financial plan to grow your wealth. If sustainable investing didn’t provide close, if not higher, market returns, it would be very difficult to convince you to adopt this strategy.
As a reference point…
the S&P 500 index (US benchmark) has returned an average of 15.1% per year (April, 2017 - 2021)
the CAC 40 index (Europe benchmark) has returned an average of 7.2% per year (April, 2017 - 2021)
Earlier I mentioned three of the most popular sustainable funds: ESGU, ESGE, and ICLN. Let’s see how these have compared during the same time period…
iShares ESG Aware MSCI USA ETF (ESGU) has returned an average of 18.1% per year (April, 2017 - 2021)
iShares ESG Aware MSCI EM ETF (ESGE) has returned an average of 11.3% per year (April, 2017 - 2021)
iShares Global Clean Energy ETF (ICLN) has returned an average of 31.1% per year (April, 2017 - 2021)
In other words, if you can expect the same, if not better returns by adopting an ESG-focused strategy, there is no reason why you shouldn’t invest sustainably.
Investing is a personal, methodical, sometimes emotional, financial plan to grow your wealth. Many advisers try to strip away the emotions, beliefs, and values that come with investing. At Lybis Investing, we think the complete opposite - How can we achieve your financial goals while investing in our future? If you’re interested in learning more and/or want a sounding board to your investment decisions, visit www.lybisinvesting.com and schedule a free appointment with me.
