Written by FASPE Business Fellows Brian Hathaway and Courtney Kaplan
In May 2019, a new investment fund focused on Environmental, Social, and Corporate Governance (ESG) issues raised $851M in its launch. BlackRock's iShares ESG fund signals a growing trend of investor interest in so-called "responsible" investing, as ESG factors can be used to measure the sustainability and ethical impact of a given business.
In past decades, ESG was often seen as a "nice-to-have" by investors, but it was understood that prioritizing sustainability would likely yield lower returns. Today, investors are less willing to accept that trade-off, and are starting to demand that companies deliver on both promises. Today, as "people [have begun] to realize that these environmental, social, and governance issues mattered to financial performance, both the corporate community and the investment community started to see things differently." In 2019, over 50 percent of assets invested in Europe are invested in sustainable investing; even in the US, that number now tops 25%.
While we applaud the ESG movement, we want to be cautious that it is discerning enough to truly reward companies that are behaving responsibly and influence companies to change. Without clearly defined metrics or true oversight, companies may take advantage of this trend without cleaning up their operations or making real commitments to change. Furthermore, investors may feel that by buying an ESG fund is a way to "check the box" on sustainability without having to make any difficult sacrifices. Is that a reasonable expectation? What are the risks associated with funds that promise that investors can have it all?
Read the original article in The Wall Street Journal.