Burton Malkiel: Does ESG Investing Deliver on its Promises?

The following is the foreword to the just-released book, Your Essential Guide to Sustainable Investing, by Larry Swedroe and Samuel Adams. The book is available from the Amazon link on this page.

Almost $22 billion flowed into investment funds with a “sustainable” objective during the first quarter of 2021. According to Bloomberg Intelligence, global assets with presumptive environmental, social, and governance (ESG) objectives may surpass $41 trillion in 2022 and $50 trillion by 2025 (more than a third of the total funds under management). The financial industry has responded by providing a plethora of new ESG funds and by rebranding existing funds. Such funds are advertised as helping to achieve a more sustainable world while enhancing investment returns as well.

There is clearly a strong demand by investors to ensure that their investments are consistent with their ethical principles. In addition to meeting financial goals, there are potential emotional benefits from investing. People want to align their investment strategies with their societal values. It would also be unambiguously advantageous if they could push the firms in which they invest to improve societal outcomes while simultaneously enhancing their financial returns. But do the investment products that advertise themselves as ESG-compliant actually deliver? How do you know if your investments will have the desired social impact? And is sustainable investing really a way to assure investors they can do well by doing good?

Amid all the hype concerning sustainable investing, there has been far too little attention paid to careful analysis of exactly what such investing really entails and what the evidence shows about its effectiveness. There is also far too little serviceable advice for investors who wish to invest sustainably. Adams and Swedroe have brilliantly fulfilled these needs with their highly readable and evidence-based guide for investors. Here they show what sustainable investing is, why one might want to do it, what financial returns have been achieved, and what its impact has been, as well as the pitfalls that exist. They also provide practical investment advice for individuals wishing to build ESG portfolios.