The Demise of ESG—Real or Rumor?

If you’re a regular reader of financial media, you’ve likely noticed some headlines on ESG—environmental, social and governance—investing and sustainable investing on your feed in recent months. Depending on which pieces you’ve chosen to read, interest in sustainable investing is either dead, floundering or thriving. Between these conflicting proclamations, what should an investor believe?

Sustainable Investing Means More Than Just ESG Equities ETFs

To address the confusion, let’s first revisit the aphorism “ESG means different things to different people.” As defined by the Global Sustainable Investors Alliance in partnership with the CFA Institute and the Principles of Responsible Investment (PRI), sustainable investing can be differentiated across five categories: 1) screening (a.k.a., Socially Responsible Investing (SRI)), 2) ESG integration, 3) thematic investing, 4) stewardship and 5) impact investing. While an investment mandate may fall into more than one of these categories, each is distinctly different in terms of technique and objectives. As a result, lumping the different types together when analyzing market trends and investment performance may lead to unmeaningful or even spurious conclusions.

To illustrate, many news stories focus on ESG equities ETFs. A significant number of these are ESG integration funds and are typically passively managed against benchmarks constructed around MSCI ratings. Many of the passive ESG ETFs are heavily tilted toward technology and exclude energy, which has resulted in significant performance dispersion in recent years. Other ESG ETFs are thematic funds that are narrowly focused on specific sectors and technologies rather than a diverse set of issuers. These integration and thematic funds are not necessarily representative of other funds with specific sustainable investing objectives.