Environmental, Social and Governance-based (ESG) investing has become a significant force in financial markets. The aim of the movement is to promote good works and good values while earning good returns.
The War in Ukraine has initiated an interesting set of discussions around ESG portfolio construction. Reconciling the goals of E, S and G has become more complicated in the wake of Russia’s aggression. As a consequence, investment design and global policy objectives are both working through healthy introspection.
ESG-style investing has been around for more than 50 years. At inception, some asset owners sought to remove support for industries like tobacco or for regimes which practiced apartheid. Decisions were binary: specific holdings were either allowed or prohibited. Today, assets managed using ESG principles total more than $35 trillion, and ESG products come in a wide array of styles.
Environmental factors in the ESG rubric include the contribution a company or government makes to the quality of air, water and soil around the world. The consequences of climate change are included under this heading.
Social considerations include a firm’s or government’s approaches to human rights, labor laws, supply chain standards, societal equity and other public policy concerns.
Governance factors encompass the manner in which firms or governments balance the interests of stakeholders. Clear rules or principles defining rights, responsibilities and expectations that balance competing interests are essential on this front.