What is ESG Investing?
ESG stands for environmental, social, and governance. ESG investing applies these factors to measure a company's sustainability and social initiatives through an ESG score. The ESG score is based on a company's sustainability efforts, such as carbon emissions, air and water pollution, deforestation, green energy initiatives, and waste management. An ESG score also considers social efforts, such as employee diversity, fair labor practices, and customer satisfaction.
Many investors value their ethics when contributing toward a company’s growth. As a result, many use ESG scores to guide whether or not they should invest in a particular company.
Be aware of ESG greenwashing:
Although the concept of ESG investing sounds great in theory, in actuality, ESG scores are heavily greenwashed. Greenwashing is when a company conveys a false impression that they are sustainable through misleading information or exaggerated claims. Unfortunately, ESG scores don’t have enough rigorous standards that hold companies accountable. Additionally, ESG scores are entirely subjective. Placing a number based on a company’s social and environmental efforts is based on opinion. As a result, it’s easy for companies to make inflated claims that, in turn, inflate their ESG scores. To add, ESG scores are usually guided by company reports, which are in the hands of the company itself. As we know, companies have a vested interest in having a higher ESG score to attract more investors. Therefore, if companies report their own information, they are more likely to make exaggerated claims and provide misleading data. But that’s the least of it. According to Delhi (2020), in 2015, Volkswagen went as far as installing “defeat devices” in the form of computer software onto their vehicles to cheat on federal emission tests. As shown, companies are willing to take extreme measures to cheat the system and have a more sustainable image in the eyes of the public.
How to avoid greenwashing:
The best way to bypass greenwashed investments is by conducting careful research. Make sure to find trustworthy and reliable sources of information that provide you with concrete data to help guide your investment decisions.
We can help you invest ethically:
Our team values our client's ethics. Although ESG scores can help determine which companies use ethical practices in their workspace, we conduct greater research to ensure the company aligns with our client’s values. If you’re seeking to invest ethically and sustainably, our team of financial professionals at U-vest will take the necessary steps to consider your ethics in every investment choice. Call us today to inquire about our investment management services.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
This article is meant to be general in nature and is not intended, and should not be construed as personal advice of any kind. Please consult your financial advisor prior to making financial decisions. Michael P. Davino, CFP® is a Financial Advisor with U-Vest Financial®, a separate entity from LPL Financial and can be reached at 850.300.7055. Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
Works cited: Delhi, N. (2020, May 27). Explained: What is the ‘dieselgate scandal’ against Volkswagen? The Indian Express. Retrieved February 9th 2022 from https://indianexpress.com/article/explained/volkswagen-dieselgate-scandal-6427918/