What is ESG Investing?

ESG investing gets a passing mention in various articles and posts. ESG stands for Environmental, Social and Governance.

Broadly speaking ESG Funds are funds that have a more moral and ethical approach, in theory. They are the same as other funds in most respects, you invest, your risks are the same, and your returns are about the same but you are usually not in things like fossil fuels or weapons. 

The issues?

Vagueness. You don’t really have to define it and it’s easy to call something ESG that isn’t. Like how a study found that over 80% of Fossil Fuel Free funds contained fossil fuels as it was a fund name and not an actual rule. ESG Funds were studied by Barclays who found that, “ESG-labelled funds do not necessarily provide more ESG exposure” key thing here is that it is a “label”, not an actual rule. You could call it the Santa Claus fund for all the difference it makes.

So is it all nonsense?

For ESG Funds, maybe. However, ESG Risk Ratings are a separate thing. Confused?

An ESG Risk rating is given to a fund by an outside agency who scores the fund on ESG criteria.  For example, an oil company may score less on the Environmental risk as climate and spills are a danger. Those with poor safety will score worse. A mobile phone company may do well on Environment but poor on Social or Governance if there are data breaches or mismanagement. ESG ratings are comparable between companies and fully independent. It’s not perfect but calling your fund  “ESG Fund” is easy. Passing through an outside analysts ESG scoring is not. 

The easiest way I’ve found is to use the Mornings Star website to look up the fund and it will show you a breakdown of ESG scores and how it compares to others. It’s a more precise measure than relying on reputation or someone’s opinion. You will often see “non ESG Funds” score far higher on ESG ratings than supposedly “ESG Focused Funds”. In summary, some ESG Funds are sometimes good but enough are not that you should be suspicious and do your homework. ESG ratings are a useful way to do this. There is more to it of course but it’s complicated and too long for a blog post.

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