ESG: To invest, or not to invest, that is the question
It’s no surprise that sustainable investing has gained considerable traction in recent years, as investors seek to align their portfolios with ethical and responsible practices. Whilst the intentions behind ESG investing are undoubtedly positive, whether firms use it for the greater good…or greater profit… is questionable.
Advocates for sustainable investing would argue that the rising importance of ESG is reflective of a growing awareness of environmental and social issues, changing the financial landscape as we know it. The idea at its core is to invest in companies that prioritise positive contributions to society and the environment, such as green energy sectors, fair trade businesses, and B Corporations. If sustainable investors can positively impact corporate behaviour, it can affect positive environmental change, enhanced governance, and contribute to a better society as a whole. Not only does ESG investing allow businesses to attract sustainably conscious clients, but it also boosts their reputation as a company. Do you really think companies would offer us these sustainable sunshine and rainbows without getting something in return? It’s a strategy, as well as a moral choice. Being publicly praised for their efforts is extremely valuable from a financial standpoint, so they might as well hop on the bandwagon, or fear being left behind.
But that’s just it. How long is sustainable investing going to last, and how far will companies go to outperform their rivals? There is a huge lack of standardisation in ESG reporting, making it difficult for investors to accurately assess a company’s commitment to sustainability. This puts companies at risk of greenwashing, exaggerating their efforts to be more sustainable without genuinely changing their business practices. Examples of these corporate commitment issues include Brewdog and Tony’s Chocolonely. Whilst the British beer giant preaches about investing in green energy initiatives, Brewdog lost their B Corporation status in 2022 after being accused of caring more about the environment than their own staff amidst toxic work culture allegations. Tony’s Chocolonely on the other hand is renowned for promoting social responsibility in the form of ethical and fair trade practices, which would be extremely uplifting if you disregarded the 1,700 child labourers who were involved in the making of the products in 2021… Unfortunately, this reality is shared by several companies, whose fault lies not in their sustainable intentions, but in their lack of transparency and honesty – not just with themselves, but with others as well, on what they can realistically achieve.
There is contradicting evidence as to whether ESG investing is financially beneficial, or damaging to an investor’s pockets. Whilst sustainable investing can turn a profit, in some cases, ESG focused businesses may underperform financially when compared to their peers. As the demand for ESG-aligned investments continues to surge, concerns also arise about the availability of both profitable and truly sustainable opportunities. Concerned by its financial viability, Vanguard withdrew from the Net Zero Asset Managers Fund, leaving the alliance in order to maintain their independence and control over investments. This questions whether investors would want to sacrifice financial gains in pursuit of sustainability, potentially endangering the economic viability of ESG investing.
The debate surrounding the longevity of sustainable investing highlights the need for a considered and honest approach. Companies must achieve the right balance between ethical commitments and financial performance. This will require improved ESG measurement standards, increased transparency, and the encouragement of responsible corporate behaviour. Also, investors should seek to actively engage with companies on ESG issues, positively contributing to the development of a rigorous and robust framework for ethical investing.
Overall, sustainable investing is at a crossroads; between the potential for transformative change and the challenges that could undermine its credibility. Despite the debate over its long-term sustainability, the traction surrounding ESG has already impacted the way investors choose to evaluate companies. That being said, investors, companies, and regulators must work together to navigate the complexities of ESG investing in order for it to be successfully maintained. It is only through a collaborative effort to address challenges, enhance transparency, and refine investment standards, that this three-letter acronym can truly fulfil its promise of positively impacting the world.
helena_richardson03@outlook.com
https://www.brewdog.com/nl_en/brewdogenvironment
https://www.theguardian.com/business/2022/dec/01/brewdog-loses-its-ethical-b-corp-certificate
https://www.thetimes.co.uk/article/anti-slavery-chocolate-brand-tonys-chocolonely-finds-1-700-child-workers-in-supply-chain-0n87qj996#:~:text=Skip%20to%20content-,Anti%2Dslavery%20chocolate%20brand%20Tony's%20Chocolonely%20finds,child%20workers%20in%20supply%20chain&text=The%20anti%2Dslavery%20chocolate%20brand,making%20its%20confectionery%20last%20year.https://www.