While many industries have their own acronyms, abbreviations, and jargon, the financial industry seems to really enjoy imposing their shortcuts on everyone else. This series will aim to de-mystify WTF the alphabet soup means and how it applies to your life.
ESG refers to a specific style of investing. It’s been a thing for a while and has gone by different names, but the current version seems to be gaining popularity. Read on to learn WTF is ESG.
ESG stands for Environmental, Social, & Governance. It’s a style of investing where the looks for companies that do good business, but also care about issues outside what is needed to make profit. Typically, people are most familiar with the first letter of ESG. As you would expect, the E is all about being kind to our planet – sustainability, carbon footprints, chemical usage, and the like. The S is for focusing on the company and it’s human relationships. Social is all about how a company treats its employees, suppliers, communities, and customers. Finally, the G is how company leadership is pushing change. Things like diversity, pay equity and internal controls fall under Governance.
ESG investing is tricky because companies are not required to report a lot of the data that an ESG investor would want to use in making their choices. Even when the info is published, it can be buried within hundreds of pages. The Securities and Exchange Commission (also known as the SEC. Because why not throw in another acronym?) recently proposed a rule saying all US publicly traded companies will have to publish how they plan to handle climate change-related risks, as well as report their emissions data. This rule isn’t even close to law, yet. But just the proposal is an important move towards giving investors the info they need. And the fact that it has been put out there means ESG has enough people talking that the SEC wants to make sure investors get good information. It means the SEC also wants to know WTF is ESG.
Of course when something gets popular, the imitators come out to play (this is why we can’t have nice things). And ESG is really popular – a recent Morgan Stanley survey found that 99% of millennial investors have at least some interest in ESG investing. The problem is that there isn’t a strict definition for what is or isn’t an ESG investment. ESG can become just a marketing ploy. There are some bad actors slapping the ESG label onto things that aren’t really ESG to attract money. We call this Greenwashing or Wokewashing. Putting an exaggerated spin on actions a company is taking or making straight-up false claims are action of greenwashers. It’s important to do some digging to make sure you’re investing in what you think you are. Look for specifics around what a company is doing, not just generalized claims.
Critics of ESG investing argue that the strategy doesn’t earn the same returns as “normal” investing. But that argument misses the point entirely. In my experience, we don’t invest in ESG because we’re looking to make The Most Money Possible (patent pending). We invest in ESG because we want to do good. We are literally voting with our dollars. The critics are so laser focused on capitalism that they don’t see the changing landscape. They’ve also been straight-up wrong about returns being lower. Since 2017, ESG funds outperformed their traditional peers.
Yet, outperformance isn’t why I offer my investing clients an ESG option. i mean, of course I want to grow my clients’ money. But I’ve also found its super important for us Millennials to feel like our money isn’t being used for evil. Our generation recognizes a lot of problems in the world. And we want to help. Putting our investment dollars in companies that recognize these same issues creates a win-win. We get to build our financial future while hopefully building a better world. Is it a perfect method? Of course not. But it’s something. Maybe it’s idealistic. Maybe it’s naive. But it explains WTF is ESG and why the idea is catching on.